JONATHAN F CAYNE SENIOR ASSOCIATE GENERAL COUNSEL 805 KING FARM BOULEVARD ROCKVILLE MD 20850 P F E
April 15 2015
Brent J Fields Secretary US Securities and Exchange Commission 100 F Street NE Washington DC 20549-1090
Re Amendment No 2 (SR-NASDAQ-2015-011)
Dear Mr Fields
NASDAQ OMX LLC filed the above-referenced filing on April 15 2015
Sincerely
Jonathan F Cayne Senior Associate General Counsel
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OMB APPROVAL
OMB Number 3235-0045 Estimated average burden hours per response38
Notice of proposed change pursuant to the Payment Clearing and Settlement Act of 2010
Section 806(e)(1) Section 806(e)(2)
Security-Based Swap Submission pursuant to the Securities Exchange Act of 1934
Section 3C(b)(2)
Exhibit 2 Sent As Paper Document Exhibit 3 Sent As Paper Document
has duly caused this filing to be signed on its behalf by the undersigned thereunto duly authorized
19b-4(f)(6)
19b-4(f)(5)
Provide a brief description of the action (limit 250 characters required when Initial is checked )
(Name ) NOTE Clicking the button at right will digitally sign and lock this form A digital signature is as legally binding as a physical signature and once signed this form cannot be changed
Executive Vice President and General Counsel
(Title )
04152015 Date
Provide the name telephone number and e-mail address of the person on the staff of the self-regulatory organization prepared to respond to questions and comments on the action
Senior Associate General Counsel Title
Contact Information
19b-4(f)(4)
19b-4(f)(2)
19b-4(f)(3)
Extension of Time Period for Commission Action
SECURITIES AND EXCHANGE COMMISSION WASHINGTON DC 20549
Form 19b-4
Withdrawal
Fax (301) 978-8472
Jonathan Last Name
2
Filing by
Pilot
NASDAQ Stock Market
011- 2015
Amendment No (req for Amendments )
File No SR -
Cayne
(301) 978-8493 Telephone
First Name
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934
Section 19(b)(3)(A) Section 19(b)(3)(B) Initial Amendment
Pursuant to Rule 19b-4 under the Securities Exchange Act of 1934
Description
Edward S Knight By
Section 19(b)(2)
19b-4(f)(1)
Page 1 of 64
Rule
Date Expires
Required fields are shown with yellow backgrounds and asterisks
SECURITIES AND EXCHANGE COMMISSION WASHINGTON DC 20549
For complete Form 19b-4 instructions please refer to the EFFS website
Form 19b-4 Information
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The self-regulatory organization must provide all required information presented in a clear and comprehensible manner to enable the public to provide meaningful comment on the proposal and for the Commission to determine whether the proposal is consistent with the Act and applicable rules and regulations under the Act
Exhibit 1 - Notice of Proposed Rule Change
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The Notice section of this Form 19b-4 must comply with the guidelines for publication in the Federal Register as well as any requirements for electronic filing as published by the Commission (if applicable) The Office of the Federal Register (OFR) offers guidance on Federal Register publication requirements in the Federal Register Document Drafting Handbook October 1998 Revision For example all references to the federal securities laws must include the corresponding cite to the United States Code in a footnote All references to SEC rules must include the corresponding cite to the Code of Federal Regulations in a footnote All references to Securities Exchange Act Releases must include the release number release date Federal Register cite Federal Register date and corresponding file number (eg SR-[SRO] -xx-xx) A material failure to comply with these guidelines will result in the proposed rule change being deemed not properly filed See also Rule 0-3 under the Act (17 CFR 2400-3)
Exhibit 1A- Notice of Proposed Rule Change Security-Based Swap Submission or Advance Notice by Clearing Agencies
Add Remove View
The Notice section of this Form 19b-4 must comply with the guidelines for publication in the Federal Register as well as any requirements for electronic filing as published by the Commission (if applicable) The Office of the Federal Register (OFR) offers guidance on Federal Register publication requirements in the Federal Register Document Drafting Handbook October 1998 Revision For example all references to the federal securities laws must include the corresponding cite to the United States Code in a footnote All references to SEC rules must include the corresponding cite to the Code of Federal Regulations in a footnote All references to Securities Exchange Act Releases must include the release number release date Federal Register cite Federal Register date and corresponding file number (eg SR-[SRO] -xx-xx) A material failure to comply with these guidelines will result in the proposed rule change security-based swap submission or advance notice being deemed not properly filed See also Rule 0-3 under the Act (17 CFR 2400-3)
Exhibit Sent As Paper Document
View
Exhibit 2 - Notices Written Comments Transcripts Other Communications
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Copies of notices written comments transcripts other communications If such documents cannot be filed electronically in accordance with Instruction F they shall be filed in accordance with Instruction G
Copies of any form report or questionnaire that the self-regulatory organization proposes to use to help implement or operate the proposed rule change or that is referred to by the proposed rule change
Exhibit 3 - Form Report or Questionnaire
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Exhibit Sent As Paper Document
Exhibit 4 - Marked Copies
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The full text shall be marked in any convenient manner to indicate additions to and deletions from the immediately preceding filing The purpose of Exhibit 4 is to permit the staff to identify immediately the changes made from the text of the rule with which it has been working
The self-regulatory organization may choose to attach as Exhibit 5 proposed changes to rule text in place of providing it in Item I and which may otherwise be more easily readable if provided separately from Form 19b-4 Exhibit 5 shall be considered part of the proposed rule change
Exhibit 5 - Proposed Rule Text
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If the self-regulatory organization is amending only part of the text of a lengthy proposed rule change it may with the Commissions permission file only those portions of the text of the proposed rule change in which changes are being made if the filing (ie partial amendment) is clearly understandable on its face Such partial amendment shall be clearly identified and marked to show deletions and additions
Partial Amendment
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SR-NASDAQ-2015-011 Amendment No 2 Page 3 of 64
1 Text of Proposed Rule Change
(a) Pursuant to the provisions of Section 19(b)(1) of the Securities Exchange Act
of 1934 (ldquoActrdquo)1 and Rule 19b-4 thereunder2 The NASDAQ Stock Market LLC
(ldquoNasdaqrdquo or the ldquoExchangerdquo) is filing with the Securities and Exchange Commission
(ldquoCommissionrdquo) a proposed rule change to list and trade the shares of the First Trust
Strategic Floating Rate ETF (the ldquoFundrdquo) of First Trust Exchange-Traded Fund IV (the
ldquoTrustrdquo) under Nasdaq Rule 5735 (ldquoManaged Fund Sharesrdquo) 3 The shares of the Fund
are collectively referred to herein as the ldquoSharesrdquo
(b) and (c) Not applicable
2 Procedures of the Self-Regulatory Organization
The proposed rule change was approved by senior management of the Exchange
pursuant to authority delegated by the Board of Directors of the Exchange (the ldquoBoardrdquo)
on July 17 2013 Exchange staff will advise the Board of any action taken pursuant to
delegated authority No other action by the Exchange is necessary for the filing of the
rule change
1 15 USC 78s(b)(1)
2 17 CFR 24019b-4
3 The Commission approved Nasdaq Rule 5735 in Securities Exchange Act Release No 57962 (June 13 2008) 73 FR 35175 (June 20 2008) (SR-NASDAQ-2008shy039) There are already multiple actively-managed funds listed on the Exchange see eg Securities Exchange Act Release Nos 69464 (April 26 2013) 78 FR 25774 (May 2 2013) (SR-NASDAQ-2013-036) (order approving listing and trading of First Trust Senior Loan Fund) 68972 (February 22 2013) 78 FR 13721 (February 28 2013) (SR-NASDAQ-2012-147) (order approving listing and trading of First Trust High Yield LongShort ETF) 66489 (February 29 2012) 77 FR 13379 (March 6 2012) (SR-NASDAQ-2012-004) (order approving listing and trading of WisdomTree Emerging Markets Corporate Bond Fund) The Exchange believes the proposed rule change raises no significant issues not previously addressed in those prior Commission orders
SR-NASDAQ-2015-011 Amendment No 2 Page 4 of 64
Questions regarding this rule filing may be directed to Jonathan F Cayne Senior
Associate General Counsel The NASDAQ OMX Group at (301) 978-8493 (telephone)
3 Self-Regulatory Organizationrsquos Statement of the Purpose of and Statutory Basis for the Proposed Rule Change
a Purpose
The Exchange proposes to list and trade the Shares of the Fund under Nasdaq
Rule 5735 which governs the listing and trading of Managed Fund Shares4 on the
Exchange The Fund will be an actively-managed exchange-traded fund (ldquoETFrdquo) The
Shares will be offered by the Trust which was established as a Massachusetts business
trust on September 15 20105 The Trust is registered with the Commission as an
investment company and has filed a registration statement on Form N-1A (ldquoRegistration
Statementrdquo) with the Commission 6 The Fund will be a series of the Trust The Fund
4 A Managed Fund Share is a security that represents an interest in an investment company registered under the Investment Company Act of 1940 (15 USC 80ashy1) (the ldquo1940 Actrdquo) organized as an open-end investment company or similar entity that invests in a portfolio of securities selected by its investment adviser consistent with its investment objectives and policies In contrast an open-end investment company that issues Index Fund Shares listed and traded on the Exchange under Nasdaq Rule 5705 seeks to provide investment results that correspond generally to the price and yield performance of a specific foreign or domestic stock index fixed income securities index or combination thereof
5 The Commission has issued an order upon which the Trust may rely granting certain exemptive relief under the 1940 Act See Investment Company Act Release No 30029 (April 10 2012) (File No 812-13795) (the ldquoExemptive Reliefrdquo) In addition the Commission has issued no-action relief upon which the Trust may rely pertaining to the Fundrsquos ability to invest in derivatives notwithstanding certain representations in the application for the Exemptive Relief See Commission No-Action Letter (December 6 2012)
6 See Post-Effective Amendment No 104 to Registration Statement on Form N-1A for the Trust dated January 29 2015 (File Nos 333-174332 and 811-22559) The descriptions of the Fund and the Shares contained herein are based in part on information in the Registration Statement
7
SR-NASDAQ-2015-011 Amendment No 2 Page 5 of 64
intends to qualify each year as a regulated investment company (ldquoRICrdquo) under
Subchapter M of the Internal Revenue Code of 1986 as amended
First Trust Advisors LP will be the investment adviser (ldquoAdviserrdquo) to the Fund
First Trust Portfolios LP (the ldquoDistributorrdquo) will be the principal underwriter and
distributor of the Fundrsquos Shares The Bank of New York Mellon Corporation (ldquoBNYrdquo)
will act as the administrator accounting agent custodian and transfer agent to the Fund
Paragraph (g) of Rule 5735 provides that if the investment adviser to the
investment company issuing Managed Fund Shares is affiliated with a broker-dealer
such investment adviser shall erect a ldquofire wallrdquo between the investment adviser and the
broker-dealer with respect to access to information concerning the composition andor
changes to such investment company portfolio7 In addition paragraph (g) further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio Rule 5735(g) is similar
An investment adviser to an open-end fund is required to be registered under the Investment Advisers Act of 1940 (the ldquoAdvisers Actrdquo) As a result the Adviser and its related personnel are subject to the provisions of Rule 204A-1 under the Advisers Act relating to codes of ethics This Rule requires investment advisers to adopt a code of ethics that reflects the fiduciary nature of the relationship to clients as well as compliance with other applicable securities laws Accordingly procedures designed to prevent the communication and misuse of non-public information by an investment adviser must be consistent with Rule 204A-1 under the Advisers Act In addition Rule 206(4)-7 under the Advisers Act makes it unlawful for an investment adviser to provide investment advice to clients unless such investment adviser has (i) adopted and implemented written policies and procedures reasonably designed to prevent violation by the investment adviser and its supervised persons of the Advisers Act and the Commission rules adopted thereunder (ii) implemented at a minimum an annual review regarding the adequacy of the policies and procedures established pursuant to subparagraph (i) above and the effectiveness of their implementation and (iii) designated an individual (who is a supervised person) responsible for administering the policies and procedures adopted under subparagraph (i) above
SR-NASDAQ-2015-011 Amendment No 2 Page 6 of 64
to Nasdaq Rule 5705(b)(5)(A)(i) however paragraph (g) in connection with the
establishment of a ldquofire wallrdquo between the investment adviser and the broker-dealer
reflects the applicable open-end fundrsquos portfolio not an underlying benchmark index as
is the case with index-based funds The Adviser is not a broker-dealer although it is
affiliated with the Distributor a broker-dealer The Adviser has implemented a fire wall
with respect to its broker-dealer affiliate regarding access to information concerning the
composition andor changes to the portfolio In addition personnel who make decisions
on the Fundrsquos portfolio composition will be subject to procedures designed to prevent the
use and dissemination of material non-public information regarding the Fundrsquos portfolio
In the event (a) the Adviser becomes or becomes newly affiliated with a broker-dealer
or (b) any new adviser or sub-adviser is a registered broker-dealer or becomes affiliated
with another broker-dealer it will implement a fire wall with respect to its relevant
personnel andor such broker-dealer affiliate as applicable regarding access to
information concerning the composition andor changes to the portfolio and will be
subject to procedures designed to prevent the use and dissemination of material
non-public information regarding such portfolio The Fund does not currently intend to
use a sub-adviser
First Trust Strategic Floating Rate ETF
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions8 at least 80 of its
The term ldquounder normal market conditionsrdquo as used herein includes but is not limited to the absence of adverse market economic political or other conditions including extreme volatility or trading halts in the fixed income markets or the financial markets generally operational issues causing dissemination of inaccurate market information or force majeure type events such as systems
8
SR-NASDAQ-2015-011 Amendment No 2 Page 7 of 64
net assets in a portfolio of the following types of floating-rate9 debt instruments issued by
US and non-US public- and private-sector entities floating-rate corporate10 and
government bonds and notes floating-rate agency securities 11 floating-rate instruments
of non-US issuers floating-rate privately-issued securities 12 floating-rate asset-backed
failure natural or man-made disaster act of God armed conflict act of terrorism riot or labor disruption or any similar intervening circumstance For temporary defensive purposes during the initial invest-up period and during periods of high cash inflows or outflows the Fund may depart from its principal investment strategies for example it may hold a higher than normal proportion of its assets in cash During such periods the Fund may not be able to achieve its investment objective The Fund may adopt a defensive strategy when the Adviser believes securities in which the Fund normally invests have elevated risks due to political or economic factors and in other extraordinary circumstances
9 For the avoidance of doubt the term ldquofloating-raterdquo shall also include similar terms such as ldquovariable-raterdquo and ldquoadjustable-raterdquo
10 The Adviser expects that under normal market conditions generally for a corporate bond to be considered as an eligible investment after taking into account such an investment at least 75 of the Fundrsquos net assets that are invested in floating-rate corporate bonds and as described below fixed-rate corporate bonds (in the aggregate) will be comprised of corporate bonds that have at the time of original issuance $100 million or more par amount outstanding
11 ldquoAgency securitiesrdquo for these purposes generally includes securities issued by the following entities Government National Mortgage Association (Ginnie Mae) Federal National Mortgage Association (Fannie Mae) Federal Home Loan Banks (FHLBanks) Federal Home Loan Mortgage Corporation (Freddie Mac) Farm Credit System (FCS) Farm Credit Banks (FCBanks) Student Loan Marketing Association (Sallie Mae) Resolution Funding Corporation (REFCORP) Financing Corporation (FICO) and the Farm Credit System (FCS) Financial Assistance Corporation (FAC) Agency securities can include but are not limited to mortgage-backed securities
12 ldquoPrivately-issued securitiesrdquo for these purposes generally includes Rule 144A securities other than mortgage-backed Rule 144A securities Under normal market conditions privately-issued securities will have at the time of original issuance $100 million or more principal amount outstanding to be considered eligible investments
SR-NASDAQ-2015-011 Amendment No 2 Page 8 of 64
securities 13 floating-rate mortgage-backed securities14 floating-rate loans 15 and
investment companies16 (including investment companies advised by the Adviser) that
13 Asset-backed securities are securities that are backed by a pool of assets The Fund currently intends to invest in asset-backed securities that are consumer asset-backed securities
14 Mortgage-backed securities which are securities that directly or indirectly represent a participation in or are secured by and payable from mortgage loans on real property will consist of (1) residential mortgage-backed securities (ldquoRMBSrdquo) (2) commercial mortgage-backed securities (ldquoCMBSrdquo) (3) stripped mortgage-backed securities (ldquoSMBSrdquo) which are mortgage-backed securities where mortgage payments are divided between paying the loanrsquos principal and paying the loanrsquos interest (4) collateralized mortgage obligations (ldquoCMOsrdquo) and real estate mortgage investment conduits (ldquoREMICsrdquo) which are mortgage-backed securities that are divided into multiple classes with each class being entitled to a different share of the principal and interest payments received from the pool of underlying assets
15 The floating-rate loans in which the Fund will invest will represent amounts borrowed by companies or other entities from banks and other lenders and a significant portion of such floating-rate loans may be rated below investment grade or unrated Floating-rate loans held by the Fund may be senior or subordinate obligations of the borrower and may or may not be secured by collateral First lien senior secured floating-rate loans are referred to herein as ldquosenior loansrdquo Floating-rate loans that are not senior loans (ie unsecured floating-rate loans and secured floating-rate loans that are not first lien floating-rate loans) are referred to herein as ldquojunior loansrdquo The Fund will generally invest in floating-rate loans that the Adviser deems to be liquid with readily available prices notwithstanding the foregoing the Fund may invest in floating-rate loans that are deemed illiquid so long as the Fund complies with the 15 limitation on investments of its net assets in illiquid assets described below under ldquoInvestment Restrictionsrdquo
16 The Fund currently anticipates investing only in registered open-end investment companies that are listed and traded in the US on registered exchanges (ie other ETFs) An ETF is an investment company registered under the 1940 Act that holds a portfolio of securities Many ETFs are designed to track the performance of a securities index including industry sector country and region indexes The Fund may invest in the securities of ETFs in excess of the limits imposed under the 1940 Act pursuant to exemptive orders obtained by other ETFs and their sponsors from the Commission In addition the Fund may invest in the securities of certain investment companies in excess of the limits imposed under the 1940 Act pursuant to an exemptive order obtained by the Trust and the Adviser from the Commission See Investment Company Act Release No 30377
SR-NASDAQ-2015-011 Amendment No 2 Page 9 of 64
invest primarily in the foregoing types of debt instruments17 (collectively ldquoFloating Rate
Debt Instrumentsrdquo)
At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade To be considered
ldquoinvestment graderdquo under normal market conditions rated Floating Rate Debt
Instruments will carry at the time of purchase a rating in the highest four rating
categories of at least one nationally recognized statistical ratings organization
(ldquoNRSROrdquo) (eg BBB- or higher by Standard amp Poorrsquos Ratings Services (ldquoSampPrdquo)
andor Fitch Ratings (ldquoFitchrdquo) or Baa3 or higher by Moodyrsquos Investors Service Inc
(ldquoMoodyrsquosrdquo)18 For unrated securities to be considered ldquoinvestment graderdquo under normal
market conditions such securities will be determined at the time of purchase to be of
comparable quality19 by the Adviser The Fund may invest up to 35 of its net assets in
(February 5 2013) (File No 812-13895) The ETFs in which the Fund may invest include Index Fund Shares (as described in Nasdaq Rule 5705) Portfolio Depository Receipts (as described in Nasdaq Rule 5705) and Managed Fund Shares (as described in Nasdaq Rule 5735) While the Fund may invest in inverse ETFs the Fund will not invest in leveraged or inverse leveraged (eg 2X or -3X) ETFs
17 The liquidity of a security especially in the case of asset-backed and mortgage-backed securities will be a substantial factor in the Fundrsquos security selection process Consistent with the discussion below under ldquoInvestment Restrictionsrdquo the Fund will not purchase any Floating Rate Debt Instruments (including asset-backed securities and mortgage-backed securities) that in the Adviserrsquos opinion are illiquid if as a result more than 15 of the value of the Fundrsquos net assets will be invested in illiquid assets
18 For the avoidance of doubt if a security is rated by multiple NRSROs and receives different ratings the Fund will treat the security as being rated in the highest rating category received from an NRSRO
19 Comparable quality of unrated securities will be determined by the Adviser based on fundamental credit analysis of the unrated security and comparable NRSRO-rated securities On a best efforts basis the Adviser will attempt to make a rating
SR-NASDAQ-2015-011 Amendment No 2 Page 10 of 64
securities that are at the time of investment rated below investment grade by each
NRSRO rating such securities (or securities that are unrated and determined by the
Adviser to be of comparable quality) commonly referred to as ldquohigh yieldrdquo or ldquojunkrdquo
bonds If subsequent to purchase by the Fund a security held by the Fund experiences a
decline in credit quality and falls below investment grade the Fund may continue to hold
the security and it will not cause the Fund to violate the 35 investment limitation
however the security will be taken into account for purposes of determining whether
purchases of additional securities will cause the Fund to violate such limitation
The Fund will limit its investments in asset-backed securities (excluding agency
mortgage-backed securities) and non-agency mortgage-backed securities (in the
aggregate) to 20 of its net assets20 In addition the Fund will limit its investments in
junior loans to 20 of its net assets
The Fund will hold debt securities (including in the aggregate Floating Rate
Debt Instruments and the fixed-rate debt securities described below) of at least 13
non-affiliated issuers
Other Investments
Under normal market conditions the Fund will invest primarily in the Floating
Rate Debt Instruments described above to meet its investment objective In addition the
determination based on publicly available data In making a ldquocomparable qualityrdquo determination the Adviser may consider for example whether the issuer of the security has issued other rated securities the nature and provisions of the relevant security whether the obligations under the relevant security are guaranteed by another entity and the rating of such guarantor (if any) relevant cash flows macroeconomic analysis andor sector or industry analysis
For the avoidance of doubt there is no limitation on the Fundrsquos investments in agency mortgage-backed securities
20
SR-NASDAQ-2015-011 Amendment No 2 Page 11 of 64
Fund may invest up to 20 of its net assets in the following types of fixed-rate debt
securities corporate21 and government bonds and notes agency securities22 instruments
of non-US issuers in developed markets privately-issued securities 23 asset-backed
securities 24 mortgage-backed securities 25 municipal bonds money market securities26
and investment companies27 (including investment companies advised by the Adviser)
that invest primarily in the foregoing types of debt securities
Further to pursue its investment objective the Fund may invest up to 20 of the
value of its net assets in exchange-listed options on US Treasury futures contracts and
exchange-listed US Treasury futures contracts28 The use of these derivative
transactions may allow the Fund to obtain net long or short exposures to selected interest
rates These derivatives may also be used to hedge risks including interest rate risks and
21 See footnote 10 above
22 See footnote 11 above
23 See footnote 12 above
24 See footnote 13 above
25 See footnote 14 above
26 ldquoMoney market securitiesrdquo for these purposes generally includes short-term high-quality obligations issued or guaranteed by the US Treasury or the agencies or instrumentalities of the US government short-term high-quality securities issued or guaranteed by non-US governments agencies and instrumentalities repurchase agreements commercial paper (both asset-backed and non-assetshybacked) and deposits and other obligations of US and non-US banks and financial institutions
27 See footnote 16 above
28 At least 90 of the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be invested in instruments that trade in markets that are members of the Intermarket Surveillance Group (ldquoISGrdquo) (see footnote 40 below) or are parties to a comprehensive surveillance sharing agreement with the Exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 12 of 64
credit risks associated with the Fundrsquos portfolio investments The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index
Investment Restrictions
The Fund will not invest 25 or more of the value of its total assets in securities
of issuers in any one industry This restriction does not apply to (a) obligations issued or
guaranteed by the US government its agencies or instrumentalities or (b) securities of
other investment companies29
The Fund may hold up to an aggregate amount of 15 of its net assets in illiquid
assets (calculated at the time of investment) including Rule 144A securities deemed
illiquid by the Adviser30 The Fund will monitor its portfolio liquidity on an ongoing
basis to determine whether in light of current circumstances an adequate level of
liquidity is being maintained and will consider taking appropriate steps in order to
maintain adequate liquidity if through a change in values net assets or other
circumstances more than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid
assets include securities subject to contractual or other restrictions on resale and other
29 See Form N-1A Item 9 The Commission has taken the position that a fund is concentrated if it invests more than 25 of the value of its total assets in any one industry See eg Investment Company Act Release No 9011 (October 30 1975) 40 FR 54241 (November 21 1975)
30 In reaching liquidity decisions the Adviser may consider the following factors the frequency of trades and quotes for the security the number of dealers wishing to purchase or sell the security and the number of other potential purchasers dealer undertakings to make a market in the security and the nature of the security and the nature of the marketplace in which it trades (eg the time needed to dispose of the security the method of soliciting offers and the mechanics of transfer)
SR-NASDAQ-2015-011 Amendment No 2 Page 13 of 64
instruments that lack readily available markets as determined in accordance with
Commission staff guidance31
The Fund will not invest in non-US equity securities
Creation and Redemption of Shares
The Fund will issue and redeem Shares on a continuous basis at net asset value
(ldquoNAVrdquo)32 only in large blocks of Shares (ldquoCreation Unitsrdquo) in transactions with
authorized participants generally including broker-dealers and large institutional
investors (ldquoAuthorized Participantsrdquo) Creation Units generally will consist of 50000
Shares although this may change from time to time Creation Units however are not
expected to consist of less than 50000 Shares As described in the Registration
Statement and consistent with the Exemptive Relief the Fund will issue and redeem
Creation Units in exchange for an in-kind portfolio of instruments andor cash in lieu of
31 The Commission has stated that long-standing Commission guidelines have required open-end funds to hold no more than 15 of their net assets in illiquid securities and other illiquid assets See Investment Company Act Release No 28193 (March 11 2008) 73 FR 14618 (March 18 2008) footnote 34 See also Investment Company Act Release No 5847 (October 21 1969) 35 FR 19989 (December 31 1970) (Statement Regarding ldquoRestricted Securitiesrdquo) Investment Company Act Release No 18612 (March 12 1992) 57 FR 9828 (March 20 1992) (Revisions of Guidelines to Form N-1A) A fundrsquos portfolio security is illiquid if it cannot be disposed of in the ordinary course of business within seven days at approximately the value ascribed to it by the fund See Investment Company Act Release No 14983 (March 12 1986) 51 FR 9773 (March 21 1986) (adopting amendments to Rule 2a-7 under the 1940 Act) Investment Company Act Release No 17452 (April 23 1990) 55 FR 17933 (April 30 1990) (adopting Rule 144A under the Securities Act of 1933)
32 The NAV of the Fundrsquos Shares generally will be calculated once daily Monday through Friday as of the close of regular trading on the New York Stock Exchange generally 400 pm Eastern Time (the ldquoNAV Calculation Timerdquo) NAV per Share will be calculated by dividing the Fundrsquos net assets by the number of Fund Shares outstanding For more information regarding the valuation of Fund investments in calculating the Fundrsquos NAV see the Registration Statement
SR-NASDAQ-2015-011 Amendment No 2 Page 14 of 64
such instruments (the ldquoCreation Basketrdquo) In addition if there is a difference between the
NAV attributable to a Creation Unit and the market value of the Creation Basket
exchanged for the Creation Unit the party conveying instruments with the lower value
will pay to the other an amount in cash equal to the difference (referred to as the ldquoCash
Componentrdquo)
Creations and redemptions must be made by or through an Authorized Participant
that has executed an agreement that has been agreed to by the Distributor and BNY with
respect to creations and redemptions of Creation Units All standard orders to create
Creation Units must be received by the transfer agent no later than the closing time of the
regular trading session on the New York Stock Exchange (ordinarily 400 pm Eastern
Time) (the ldquoClosing Timerdquo) in each case on the date such order is placed in order for the
creation of Creation Units to be effected based on the NAV of Shares as next determined
on such date after receipt of the order in proper form Shares may be redeemed only in
Creation Units at their NAV next determined after receipt not later than the Closing Time
of a redemption request in proper form by the Fund through the transfer agent and only
on a business day
The Fundrsquos custodian through the National Securities Clearing Corporation will
make available on each business day prior to the opening of business of the Exchange
the list of the names and quantities of the instruments comprising the Creation Basket as
well as the estimated Cash Component (if any) for that day The published Creation
Basket will apply until a new Creation Basket is announced on the following business
day prior to commencement of trading in the Shares
SR-NASDAQ-2015-011 Amendment No 2 Page 15 of 64
Net Asset Value
The Fundrsquos NAV will be determined as of the close of trading (normally
400 pm Eastern Time) on each day the New York Stock Exchange is open for
business NAV will be calculated for the Fund by taking the market price of the Fundrsquos
total assets including interest or dividends accrued but not yet collected less all
liabilities and dividing such amount by the total number of Shares outstanding The
result rounded to the nearest cent will be the NAV per Share All valuations will be
subject to review by the Board of Trustees of the Trust (ldquoTrust Boardrdquo) or its delegate
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with valuation procedures (which may be revised from time to time) adopted by the Trust
Board (the ldquoValuation Proceduresrdquo) and in accordance with the 1940 Act A market
valuation generally means a valuation (i) obtained from an exchange an independent
pricing service (ldquoPricing Servicerdquo) or a major market maker (or dealer) or (ii) based on a
price quotation or other equivalent indication of value supplied by an exchange a Pricing
Service or a major market maker (or dealer) The information summarized below is
based on the Valuation Procedures as currently in effect however as noted above the
Valuation Procedures are amended from time to time and therefore such information is
subject to change
Certain securities including Floating Rate Debt Instruments in which the Fund
may invest will not be listed on any securities exchange or board of trade Such
securities will typically be bought and sold by institutional investors in individually
negotiated private transactions that function in many respects like an over-the-counter
SR-NASDAQ-2015-011 Amendment No 2 Page 16 of 64
secondary market although typically no formal market makers will exist Certain
securities particularly debt securities will have few or no trades or trade infrequently
and information regarding a specific security may not be widely available or may be
incomplete Accordingly determinations of the fair value of debt securities may be
based on infrequent and dated information Because there is less reliable objective data
available elements of judgment may play a greater role in valuation of debt securities
than for other types of securities Typically Floating Rate Debt Instruments and other
debt securities in which the Fund may invest (other than those described below) will be
valued using information provided by a Pricing Service Debt securities having a
remaining maturity of 60 days or less when purchased will be valued at cost adjusted for
amortization of premiums and accretion of discounts provided the Adviserrsquos pricing
committee (the ldquoPricing Committeerdquo) has determined that the use of amortized cost is an
appropriate reflection of fair value given market and issuer-specific conditions existing at
the time of the determination Overnight repurchase agreements will be valued at cost
and term repurchase agreements (ie those whose maturity exceeds seven days) will be
valued at the average of the bid quotations obtained daily from at least two recognized
dealers
Asset-backed and mortgage-backed securities will generally be valued by using a
Pricing Service If a Pricing Service does not cover a particular asset-backed or
mortgage-backed security or discontinues covering a particular asset-backed or
mortgage-backed security the security will be priced using broker quotes generally
provided by brokers that make or participate in markets in the security To derive values
Pricing Services and broker-dealers may use matrix pricing and valuation models as well
SR-NASDAQ-2015-011 Amendment No 2 Page 17 of 64
as recent market transactions for the same or similar assets As it deems appropriate the
Pricing Committee may determine that a Pricing Service price does not represent an
accurate value of an asset-backed or mortgage-backed security based on broker quotes it
receives a recent trade in the security by the Fund information from a portfolio manager
or other market information In the event that the Pricing Committee determines that the
Pricing Service price is unreliable or inaccurate based on such other information broker
quotes may be used Additionally if the Pricing Committee determines that the price of
an asset-backed or mortgage-backed security obtained from a Pricing Service and
available broker quotes is unreliable or inaccurate due to market conditions or other
reasons or if a Pricing Service price or broker quote is unavailable the security will be
valued using fair value pricing as described below
Equity securities listed on any exchange other than the Exchange will be valued at
the last sale price on the exchange on which they are principally traded on the business
day as of which such value is being determined Equity securities listed on the Exchange
will be valued at the official closing price on the business day as of which such value is
being determined If there has been no sale on such day or no official closing price in
the case of securities traded on the Exchange the securities will be valued using fair
value pricing as described below Equity securities traded on more than one securities
exchange will be valued at the last sale price or official closing price as applicable on
the business day as of which such value is being determined at the close of the exchange
representing the principal market for such securities
Exchange-traded options and futures contracts will be valued at the closing price
in the market where such contracts are principally traded
SR-NASDAQ-2015-011 Amendment No 2 Page 18 of 64
Certain securities including Floating Rate Debt Instruments in which the Fund
will invest will not be able to be priced by pre-established pricing methods Such
securities may be valued by the Trust Board or its delegate at fair value The use of fair
value pricing by the Fund will be governed by the Valuation Procedures and conducted in
accordance with the provisions of the 1940 Act Valuing the Fundrsquos securities using fair
value pricing will result in using prices for those securities that may differ from current
market valuations or official closing prices on the applicable exchange
Availability of Information
The Fundrsquos website (wwwftportfolioscom) which will be publicly available
prior to the public offering of Shares will include a form of the prospectus for the Fund
that may be downloaded The website will include the Sharesrsquo ticker CUSIP and
exchange information along with additional quantitative information updated on a daily
basis including for the Fund (1) daily trading volume the prior business dayrsquos reported
NAV and closing price mid-point of the bidask spread at the time of calculation of such
NAV (the ldquoBidAsk Pricerdquo)33 and a calculation of the premium and discount of the
BidAsk Price against the NAV and (2) data in chart format displaying the frequency
distribution of discounts and premiums of the daily BidAsk Price against the NAV
within appropriate ranges for each of the four previous calendar quarters On each
business day before commencement of trading in Shares in the Regular Market Session34
33 The BidAsk Price of the Fund will be determined using the mid-point of the highest bid and the lowest offer on the Exchange as of the time of calculation of the Fundrsquos NAV The records relating to BidAsk Prices will be retained by the Fund and its service providers
34 See Nasdaq Rule 4120(b)(4) (describing the three trading sessions on the Exchange (1) Pre-Market Session from 4 am to 930 am Eastern Time (2)
SR-NASDAQ-2015-011 Amendment No 2 Page 19 of 64
on the Exchange the Fund will disclose on its website the identities and quantities of the
portfolio of securities and other assets (the ldquoDisclosed Portfoliordquo as defined in Nasdaq
Rule 5735(c)(2)) held by the Fund that will form the basis for the Fundrsquos calculation of
NAV at the end of the business day 35 The Fundrsquos disclosure of derivative positions in
the Disclosed Portfolio will include information that market participants can use to value
these positions intraday On a daily basis the Fund will disclose on the Fundrsquos website
the following information regarding each portfolio holding as applicable to the type of
holding ticker symbol CUSIP number or other identifier if any a description of the
holding (including the type of holding) the identity of the security or other asset or
instrument underlying the holding if any for options the option strike price quantity
held (as measured by for example par value notional value or number of shares
contracts or units) maturity date if any coupon rate if any effective date if any market
value of the holding and percentage weighting of the holding in the Fundrsquos portfolio
The website information will be publicly available at no charge
In addition for the Fund an estimated value defined in Rule 5735(c)(3) as the
ldquoIntraday Indicative Valuerdquo that reflects an estimated intraday value of the Fundrsquos
Disclosed Portfolio will be disseminated Moreover the Intraday Indicative Value
Regular Market Session from 930 am to 4 pm or 415 pm Eastern Time and (3) Post-Market Session from 4 pm or 415 pm to 8 pm Eastern Time)
Under accounting procedures to be followed by the Fund trades made on the prior business day (ldquoTrdquo) will be booked and reflected in NAV on the current business day (ldquoT+1rdquo) Accordingly the Fund will be able to disclose at the beginning of the business day the portfolio that will form the basis for the NAV calculation at the end of the business day
35
SR-NASDAQ-2015-011 Amendment No 2 Page 20 of 64
available on the NASDAQ OMX Information LLC proprietary index data service36 will
be based upon the current value for the components of the Disclosed Portfolio and will be
updated and widely disseminated by one or more major market data vendors and broadly
displayed at least every 15 seconds during the Regular Market Session The Intraday
Indicative Value will be based on quotes and closing prices from the securitiesrsquo local
market and may not reflect events that occur subsequent to the local marketrsquos close
Premiums and discounts between the Intraday Indicative Value and the market price may
occur This should not be viewed as a ldquoreal timerdquo update of the NAV per Share of the
Fund which is calculated only once a day
The dissemination of the Intraday Indicative Value together with the Disclosed
Portfolio will allow investors to determine the value of the underlying portfolio of the
Fund on a daily basis and will provide a close estimate of that value throughout the
trading day
Investors will also be able to obtain the Fundrsquos Statement of Additional
Information (ldquoSAIrdquo) the Fundrsquos annual and semi-annual reports (together ldquoShareholder
Reportsrdquo) and its Form N-CSR and Form N-SAR filed twice a year The Fundrsquos SAI
and Shareholder Reports will be available free upon request from the Fund and those
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or
downloaded from the Commissionrsquos website at wwwsecgov Information regarding
market price and trading volume of the Shares will be continually available on a real-time
Currently the NASDAQ OMX Global Index Data Service (ldquoGIDSrdquo) is the NASDAQ OMX global index data feed service offering real-time updates daily summary messages and access to widely followed indexes and Intraday Indicative Values for ETFs GIDS provides investment professionals with the daily information needed to track or trade NASDAQ OMX indexes listed ETFs or third-party partner indexes and ETFs
36
SR-NASDAQ-2015-011 Amendment No 2 Page 21 of 64
basis throughout the day on brokersrsquo computer screens and other electronic services
Information regarding the previous dayrsquos closing price and trading volume information
for the Shares will be published daily in the financial section of newspapers Quotation
and last sale information for the Shares will be available via Nasdaq proprietary quote
and trade services as well as in accordance with the Unlisted Trading Privileges and the
Consolidated Tape Association (ldquoCTArdquo) plans for the Shares Quotation and last sale
information for the other ETFs in which the Fund will invest will be available via the
quote and trade services of their respective primary exchanges as well as in accordance
with the Unlisted Trading Privileges and the CTA plans as applicable Quotation and
last sale information for US exchange-traded options will be available via the Options
Price Reporting Authority Intraday executable price quotations on Floating Rate Debt
Instruments and other assets not traded on an exchange will be available from major
broker-dealer firms or market data vendors as well as from automated quotation systems
published or other public sources or online information services Additionally the Trade
Reporting and Compliance Engine (ldquoTRACErdquo) of the Financial Industry Regulatory
Authority (ldquoFINRArdquo) will be a source of price information for corporate bonds
privately-issued securities mortgage-backed securities and asset-backed securities to the
extent transactions in such securities are reported to TRACE37 For exchange-traded
assets intraday pricing information will be available directly from the applicable listing
exchange
Broker-dealers that are FINRA member firms have an obligation to report transactions in specified debt securities to TRACE to the extent required under applicable FINRA rules Generally such debt securities will have at issuance a maturity that exceeds one calendar year
37
SR-NASDAQ-2015-011 Amendment No 2 Page 22 of 64
Additional information regarding the Fund and the Shares including investment
strategies risks creation and redemption procedures fees Fund holdings disclosure
policies distributions and taxes will be included in the Registration Statement
Initial and Continued Listing
The Shares will be subject to Rule 5735 which sets forth the initial and continued
listing criteria applicable to Managed Fund Shares The Exchange represents that for
initial andor continued listing the Fund must be in compliance with Rule 10A-338 under
the Act A minimum of 100000 Shares will be outstanding at the commencement of
trading on the Exchange The Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the NAV and the
Disclosed Portfolio will be made available to all market participants at the same time
Trading Halts
With respect to trading halts the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading in the Shares of the Fund Nasdaq will
halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12) Trading may be
halted because of market conditions or for reasons that in the view of the Exchange
make trading in the Shares inadvisable These may include (1) the extent to which
trading is not occurring in the securities andor the other assets constituting the Disclosed
Portfolio of the Fund or (2) whether other unusual conditions or circumstances
detrimental to the maintenance of a fair and orderly market are present Trading in the
See 17 CFR 24010A-3 38
SR-NASDAQ-2015-011 Amendment No 2 Page 23 of 64
Shares also will be subject to Rule 5735(d)(2)(D) which sets forth circumstances under
which Shares of the Fund may be halted
Trading Rules
Nasdaq deems the Shares to be equity securities thus rendering trading in the
Shares subject to Nasdaqrsquos existing rules governing the trading of equity securities
Nasdaq will allow trading in the Shares from 400 am until 800 pm Eastern Time
The Exchange has appropriate rules to facilitate transactions in the Shares during all
trading sessions As provided in Nasdaq Rule 5735(b)(3) the minimum price variation
for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $001
Surveillance
The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws39 The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities laws
The surveillances referred to above generally focus on detecting securities trading
outside their normal patterns which could be indicative of manipulative or other violative
activity When such situations are detected surveillance analysis follows and
investigations are opened where appropriate to review the behavior of all relevant
parties for all relevant trading violations
FINRA surveils trading on the Exchange pursuant to a regulatory services agreement The Exchange is responsible for FINRArsquos performance under this regulatory services agreement
39
SR-NASDAQ-2015-011 Amendment No 2 Page 24 of 64
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 25 of 64
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
b Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
SR-NASDAQ-2015-011 Amendment No 2 Page 26 of 64
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
SR-NASDAQ-2015-011 Amendment No 2 Page 27 of 64
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
SR-NASDAQ-2015-011 Amendment No 2 Page 28 of 64
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
SR-NASDAQ-2015-011 Amendment No 2 Page 29 of 64
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
SR-NASDAQ-2015-011 Amendment No 2 Page 30 of 64
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
SR-NASDAQ-2015-011 Amendment No 2 Page 31 of 64
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
4 Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
5 Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received from Members Participants or Others
Written comments were neither solicited nor received
6 Extension of Time Period for Commission Action
The Exchange does not consent at this time to an extension of any time period for
Commission action
7 Basis for Summary Effectiveness Pursuant to Section 19(b)(3) or for Accelerated Effectiveness Pursuant to Section 19(b)(2)
Not applicable
8 Proposed Rule Change Based on Rules of Another Self-Regulatory Organization or of the Commission
Not applicable
9 Security-Based Swap Submissions Filed Pursuant to Section 3C of the Act
Not applicable
SR-NASDAQ-2015-011 Amendment No 2 Page 32 of 64
10 Advance Notices Filed Pursuant to Section 806(e) of the Payment Clearing and Settlement Supervision Act
Not applicable
11 Exhibits
1 Completed notice of proposed rule change for publication in the Federal
Register
SR-NASDAQ-2015-011 Amendment No 2 Page 33 of 64
EXHIBIT 1
SECURITIES AND EXCHANGE COMMISSION (Release No 34shy File No SR-NASDAQ-2015-011)
April __ 2015
Self-Regulatory Organizations The NASDAQ Stock Market LLC Notice of Filing of Proposed Rule Change Relating to the Listing and Trading of the Shares of the First Trust Strategic Floating Rate ETF of First Trust Exchange-Traded Fund IV
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (ldquoActrdquo)1 and
Rule 19b-4 thereunder2 notice is hereby given that on February 12 2015 The NASDAQ
Stock Market LLC (ldquoNasdaqrdquo or the ldquoExchangerdquo) filed with the Securities and Exchange
Commission (ldquoCommissionrdquo) the proposed rule change as described in in Items I II and
III below which Items have been prepared by Nasdaq On April 6 2015 Nasdaq filed
Amendment No 1 which replaced the text of the original filing in its entirety On April
15 2015 Nasdaq filed Amendment No 2 which replaced the text of the original filing in
its entirety The Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons
I Self-Regulatory Organizationrsquos Statement of the Terms of Substance of the Proposed Rule Change
Nasdaq proposes to list and trade the shares of the First Trust Strategic Floating
Rate ETF (the ldquoFundrdquo) of the First Trust Strategic Floating Rate ETF (the ldquoFundrdquo) of
First Trust Exchange-Traded Fund IV (the ldquoTrustrdquo) under Nasdaq Rule 5735 (ldquoManaged
1 15 USC 78s(b)(1)
2 17 CFR 24019b-4
SR-NASDAQ-2015-011 Amendment No 2 Page 34 of 64
Fund Sharesrdquo)3 The shares of the Fund are collectively referred to herein as the
ldquoSharesrdquo
The text of the proposed rule change is available at
httpnasdaqcchwallstreetcom at Nasdaqrsquos principal office and at the Commissionrsquos
Public Reference Room
II Self-Regulatory Organizationrsquos Statement of the Purpose of and Statutory Basis for the Proposed Rule Change
In its filing with the Commission Nasdaq included statements concerning the
purpose of and basis for the proposed rule change The text of these statements may be
examined at the places specified in Item IV below Nasdaq has prepared summaries set
forth in Sections A B and C below of the most significant aspects of such statements
A Self-Regulatory Organizationrsquos Statement of the Purpose of and Statutory Basis for the Proposed Rule Change
1 Purpose
The Exchange proposes to list and trade the Shares of the Fund under Nasdaq
Rule 5735 which governs the listing and trading of Managed Fund Shares4 on the
3 The Commission approved Nasdaq Rule 5735 in Securities Exchange Act Release No 57962 (June 13 2008) 73 FR 35175 (June 20 2008) (SR-NASDAQ-2008shy039) There are already multiple actively-managed funds listed on the Exchange see eg Securities Exchange Act Release Nos 69464 (April 26 2013) 78 FR 25774 (May 2 2013) (SR-NASDAQ-2013-036) (order approving listing and trading of First Trust Senior Loan Fund) 68972 (February 22 2013) 78 FR 13721 (February 28 2013) (SR-NASDAQ-2012-147) (order approving listing and trading of First Trust High Yield LongShort ETF) 66489 (February 29 2012) 77 FR 13379 (March 6 2012) (SR-NASDAQ-2012-004) (order approving listing and trading of WisdomTree Emerging Markets Corporate Bond Fund) The Exchange believes the proposed rule change raises no significant issues not previously addressed in those prior Commission orders
4 A Managed Fund Share is a security that represents an interest in an investment company registered under the Investment Company Act of 1940 (15 USC 80ashy
SR-NASDAQ-2015-011 Amendment No 2 Page 35 of 64
Exchange The Fund will be an actively-managed exchange-traded fund (ldquoETFrdquo) The
Shares will be offered by the Trust which was established as a Massachusetts business
trust on September 15 20105 The Trust is registered with the Commission as an
investment company and has filed a registration statement on Form N-1A (ldquoRegistration
Statementrdquo) with the Commission6 The Fund will be a series of the Trust The Fund
intends to qualify each year as a regulated investment company (ldquoRICrdquo) under
Subchapter M of the Internal Revenue Code of 1986 as amended
First Trust Advisors LP will be the investment adviser (ldquoAdviserrdquo) to the Fund
First Trust Portfolios LP (the ldquoDistributorrdquo) will be the principal underwriter and
distributor of the Fundrsquos Shares The Bank of New York Mellon Corporation (ldquoBNYrdquo)
will act as the administrator accounting agent custodian and transfer agent to the Fund
1) (the ldquo1940 Actrdquo) organized as an open-end investment company or similar entity that invests in a portfolio of securities selected by its investment adviser consistent with its investment objectives and policies In contrast an open-end investment company that issues Index Fund Shares listed and traded on the Exchange under Nasdaq Rule 5705 seeks to provide investment results that correspond generally to the price and yield performance of a specific foreign or domestic stock index fixed income securities index or combination thereof
5 The Commission has issued an order upon which the Trust may rely granting certain exemptive relief under the 1940 Act See Investment Company Act Release No 30029 (April 10 2012) (File No 812-13795) (the ldquoExemptive Reliefrdquo) In addition the Commission has issued no-action relief upon which the Trust may rely pertaining to the Fundrsquos ability to invest in derivatives notwithstanding certain representations in the application for the Exemptive Relief See Commission No-Action Letter (December 6 2012)
6 See Post-Effective Amendment No 104 to Registration Statement on Form N-1A for the Trust dated January 29 2015 (File Nos 333-174332 and 811-22559) The descriptions of the Fund and the Shares contained herein are based in part on information in the Registration Statement
7
SR-NASDAQ-2015-011 Amendment No 2 Page 36 of 64
Paragraph (g) of Rule 5735 provides that if the investment adviser to the
investment company issuing Managed Fund Shares is affiliated with a broker-dealer
such investment adviser shall erect a ldquofire wallrdquo between the investment adviser and the
broker-dealer with respect to access to information concerning the composition andor
changes to such investment company portfolio7 In addition paragraph (g) further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio Rule 5735(g) is similar
to Nasdaq Rule 5705(b)(5)(A)(i) however paragraph (g) in connection with the
establishment of a ldquofire wallrdquo between the investment adviser and the broker-dealer
reflects the applicable open-end fundrsquos portfolio not an underlying benchmark index as
is the case with index-based funds The Adviser is not a broker-dealer although it is
affiliated with the Distributor a broker-dealer The Adviser has implemented a fire wall
An investment adviser to an open-end fund is required to be registered under the Investment Advisers Act of 1940 (the ldquoAdvisers Actrdquo) As a result the Adviser and its related personnel are subject to the provisions of Rule 204A-1 under the Advisers Act relating to codes of ethics This Rule requires investment advisers to adopt a code of ethics that reflects the fiduciary nature of the relationship to clients as well as compliance with other applicable securities laws Accordingly procedures designed to prevent the communication and misuse of non-public information by an investment adviser must be consistent with Rule 204A-1 under the Advisers Act In addition Rule 206(4)-7 under the Advisers Act makes it unlawful for an investment adviser to provide investment advice to clients unless such investment adviser has (i) adopted and implemented written policies and procedures reasonably designed to prevent violation by the investment adviser and its supervised persons of the Advisers Act and the Commission rules adopted thereunder (ii) implemented at a minimum an annual review regarding the adequacy of the policies and procedures established pursuant to subparagraph (i) above and the effectiveness of their implementation and (iii) designated an individual (who is a supervised person) responsible for administering the policies and procedures adopted under subparagraph (i) above
8
SR-NASDAQ-2015-011 Amendment No 2 Page 37 of 64
with respect to its broker-dealer affiliate regarding access to information concerning the
composition andor changes to the portfolio In addition personnel who make decisions
on the Fundrsquos portfolio composition will be subject to procedures designed to prevent the
use and dissemination of material non-public information regarding the Fundrsquos portfolio
In the event (a) the Adviser becomes or becomes newly affiliated with a broker-dealer
or (b) any new adviser or sub-adviser is a registered broker-dealer or becomes affiliated
with another broker-dealer it will implement a fire wall with respect to its relevant
personnel andor such broker-dealer affiliate as applicable regarding access to
information concerning the composition andor changes to the portfolio and will be
subject to procedures designed to prevent the use and dissemination of material
non-public information regarding such portfolio The Fund does not currently intend to
use a sub-adviser
First Trust Strategic Floating Rate ETF
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions8 at least 80 of its
The term ldquounder normal market conditionsrdquo as used herein includes but is not limited to the absence of adverse market economic political or other conditions including extreme volatility or trading halts in the fixed income markets or the financial markets generally operational issues causing dissemination of inaccurate market information or force majeure type events such as systems failure natural or man-made disaster act of God armed conflict act of terrorism riot or labor disruption or any similar intervening circumstance For temporary defensive purposes during the initial invest-up period and during periods of high cash inflows or outflows the Fund may depart from its principal investment strategies for example it may hold a higher than normal proportion of its assets in cash During such periods the Fund may not be able to achieve its investment objective The Fund may adopt a defensive strategy when the Adviser believes securities in which the Fund normally invests have elevated risks due to political or economic factors and in other extraordinary circumstances
SR-NASDAQ-2015-011 Amendment No 2 Page 38 of 64
net assets in a portfolio of the following types of floating-rate9 debt instruments issued by
US and non-US public- and private-sector entities floating-rate corporate10 and
government bonds and notes floating-rate agency securities 11 floating-rate instruments
of non-US issuers floating-rate privately-issued securities 12 floating-rate asset-backed
securities 13 floating-rate mortgage-backed securities14 floating-rate loans 15 and
9 For the avoidance of doubt the term ldquofloating-raterdquo shall also include similar terms such as ldquovariable-raterdquo and ldquoadjustable-raterdquo
10 The Adviser expects that under normal market conditions generally for a corporate bond to be considered as an eligible investment after taking into account such an investment at least 75 of the Fundrsquos net assets that are invested in floating-rate corporate bonds and as described below fixed-rate corporate bonds (in the aggregate) will be comprised of corporate bonds that have at the time of original issuance $100 million or more par amount outstanding
11 ldquoAgency securitiesrdquo for these purposes generally includes securities issued by the following entities Government National Mortgage Association (Ginnie Mae) Federal National Mortgage Association (Fannie Mae) Federal Home Loan Banks (FHLBanks) Federal Home Loan Mortgage Corporation (Freddie Mac) Farm Credit System (FCS) Farm Credit Banks (FCBanks) Student Loan Marketing Association (Sallie Mae) Resolution Funding Corporation (REFCORP) Financing Corporation (FICO) and the Farm Credit System (FCS) Financial Assistance Corporation (FAC) Agency securities can include but are not limited to mortgage-backed securities
12 ldquoPrivately-issued securitiesrdquo for these purposes generally includes Rule 144A securities other than mortgage-backed Rule 144A securities Under normal market conditions privately-issued securities will have at the time of original issuance $100 million or more principal amount outstanding to be considered eligible investments
13 Asset-backed securities are securities that are backed by a pool of assets The Fund currently intends to invest in asset-backed securities that are consumer asset-backed securities
14 Mortgage-backed securities which are securities that directly or indirectly represent a participation in or are secured by and payable from mortgage loans on real property will consist of (1) residential mortgage-backed securities (ldquoRMBSrdquo) (2) commercial mortgage-backed securities (ldquoCMBSrdquo) (3) stripped mortgage-backed securities (ldquoSMBSrdquo) which are mortgage-backed securities
SR-NASDAQ-2015-011 Amendment No 2 Page 39 of 64
investment companies16 (including investment companies advised by the Adviser) that
invest primarily in the foregoing types of debt instruments17 (collectively ldquoFloating Rate
Debt Instrumentsrdquo)
where mortgage payments are divided between paying the loanrsquos principal and paying the loanrsquos interest (4) collateralized mortgage obligations (ldquoCMOsrdquo) and real estate mortgage investment conduits (ldquoREMICsrdquo) which are mortgage-backed securities that are divided into multiple classes with each class being entitled to a different share of the principal and interest payments received from the pool of underlying assets
15 The floating-rate loans in which the Fund will invest will represent amounts borrowed by companies or other entities from banks and other lenders and a significant portion of such floating-rate loans may be rated below investment grade or unrated Floating-rate loans held by the Fund may be senior or subordinate obligations of the borrower and may or may not be secured by collateral First lien senior secured floating-rate loans are referred to herein as ldquosenior loansrdquo Floating-rate loans that are not senior loans (ie unsecured floating-rate loans and secured floating-rate loans that are not first lien floating-rate loans) are referred to herein as ldquojunior loansrdquo The Fund will generally invest in floating-rate loans that the Adviser deems to be liquid with readily available prices notwithstanding the foregoing the Fund may invest in floating-rate loans that are deemed illiquid so long as the Fund complies with the 15 limitation on investments of its net assets in illiquid assets described below under ldquoInvestment Restrictionsrdquo
16 The Fund currently anticipates investing only in registered open-end investment companies that are listed and traded in the US on registered exchanges (ie other ETFs) An ETF is an investment company registered under the 1940 Act that holds a portfolio of securities Many ETFs are designed to track the performance of a securities index including industry sector country and region indexes The Fund may invest in the securities of ETFs in excess of the limits imposed under the 1940 Act pursuant to exemptive orders obtained by other ETFs and their sponsors from the Commission In addition the Fund may invest in the securities of certain investment companies in excess of the limits imposed under the 1940 Act pursuant to an exemptive order obtained by the Trust and the Adviser from the Commission See Investment Company Act Release No 30377 (February 5 2013) (File No 812-13895) The ETFs in which the Fund may invest include Index Fund Shares (as described in Nasdaq Rule 5705) Portfolio Depository Receipts (as described in Nasdaq Rule 5705) and Managed Fund Shares (as described in Nasdaq Rule 5735) While the Fund may invest in inverse ETFs the Fund will not invest in leveraged or inverse leveraged (eg 2X or -3X) ETFs
SR-NASDAQ-2015-011 Amendment No 2 Page 40 of 64
At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade To be considered
ldquoinvestment graderdquo under normal market conditions rated Floating Rate Debt
Instruments will carry at the time of purchase a rating in the highest four rating
categories of at least one nationally recognized statistical ratings organization
(ldquoNRSROrdquo) (eg BBB- or higher by Standard amp Poorrsquos Ratings Services (ldquoSampPrdquo)
andor Fitch Ratings (ldquoFitchrdquo) or Baa3 or higher by Moodyrsquos Investors Service Inc
(ldquoMoodyrsquosrdquo)18 For unrated securities to be considered ldquoinvestment graderdquo under normal
market conditions such securities will be determined at the time of purchase to be of
comparable quality19 by the Adviser The Fund may invest up to 35 of its net assets in
securities that are at the time of investment rated below investment grade by each
NRSRO rating such securities (or securities that are unrated and determined by the
17 The liquidity of a security especially in the case of asset-backed and mortgage-backed securities will be a substantial factor in the Fundrsquos security selection process Consistent with the discussion below under ldquoInvestment Restrictionsrdquo the Fund will not purchase any Floating Rate Debt Instruments (including asset-backed securities and mortgage-backed securities) that in the Adviserrsquos opinion are illiquid if as a result more than 15 of the value of the Fundrsquos net assets will be invested in illiquid assets
18 For the avoidance of doubt if a security is rated by multiple NRSROs and receives different ratings the Fund will treat the security as being rated in the highest rating category received from an NRSRO
19 Comparable quality of unrated securities will be determined by the Adviser based on fundamental credit analysis of the unrated security and comparable NRSRO-rated securities On a best efforts basis the Adviser will attempt to make a rating determination based on publicly available data In making a ldquocomparable qualityrdquo determination the Adviser may consider for example whether the issuer of the security has issued other rated securities the nature and provisions of the relevant security whether the obligations under the relevant security are guaranteed by another entity and the rating of such guarantor (if any) relevant cash flows macroeconomic analysis andor sector or industry analysis
SR-NASDAQ-2015-011 Amendment No 2 Page 41 of 64
Adviser to be of comparable quality) commonly referred to as ldquohigh yieldrdquo or ldquojunkrdquo
bonds If subsequent to purchase by the Fund a security held by the Fund experiences a
decline in credit quality and falls below investment grade the Fund may continue to hold
the security and it will not cause the Fund to violate the 35 investment limitation
however the security will be taken into account for purposes of determining whether
purchases of additional securities will cause the Fund to violate such limitation
The Fund will limit its investments in asset-backed securities (excluding agency
mortgage-backed securities) and non-agency mortgage-backed securities (in the
aggregate) to 20 of its net assets20 In addition the Fund will limit its investments in
junior loans to 20 of its net assets
The Fund will hold debt securities (including in the aggregate Floating Rate
Debt Instruments and the fixed-rate debt securities described below) of at least 13
non-affiliated issuers
Other Investments
Under normal market conditions the Fund will invest primarily in the Floating
Rate Debt Instruments described above to meet its investment objective In addition the
Fund may invest up to 20 of its net assets in the following types of fixed-rate debt
securities corporate21 and government bonds and notes agency securities22 instruments
20 For the avoidance of doubt there is no limitation on the Fundrsquos investments in agency mortgage-backed securities
21 See footnote 10 above
22 See footnote 11 above
SR-NASDAQ-2015-011 Amendment No 2 Page 42 of 64
of non-US issuers in developed markets privately-issued securities 23 asset-backed
securities 24 mortgage-backed securities 25 municipal bonds money market securities26
and investment companies27 (including investment companies advised by the Adviser)
that invest primarily in the foregoing types of debt securities
Further to pursue its investment objective the Fund may invest up to 20 of the
value of its net assets in exchange-listed options on US Treasury futures contracts and
exchange-listed US Treasury futures contracts28 The use of these derivative
transactions may allow the Fund to obtain net long or short exposures to selected interest
rates These derivatives may also be used to hedge risks including interest rate risks and
credit risks associated with the Fundrsquos portfolio investments The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
23 See footnote 12 above
24 See footnote 13 above
25 See footnote 14 above
26 ldquoMoney market securitiesrdquo for these purposes generally includes short-term high-quality obligations issued or guaranteed by the US Treasury or the agencies or instrumentalities of the US government short-term high-quality securities issued or guaranteed by non-US governments agencies and instrumentalities repurchase agreements commercial paper (both asset-backed and non-assetshybacked) and deposits and other obligations of US and non-US banks and financial institutions
27 See footnote 16 above
28 At least 90 of the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be invested in instruments that trade in markets that are members of the Intermarket Surveillance Group (ldquoISGrdquo) (see footnote 40 below) or are parties to a comprehensive surveillance sharing agreement with the Exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 43 of 64
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index
Investment Restrictions
The Fund will not invest 25 or more of the value of its total assets in securities
of issuers in any one industry This restriction does not apply to (a) obligations issued or
guaranteed by the US government its agencies or instrumentalities or (b) securities of
other investment companies29
The Fund may hold up to an aggregate amount of 15 of its net assets in illiquid
assets (calculated at the time of investment) including Rule 144A securities deemed
illiquid by the Adviser30 The Fund will monitor its portfolio liquidity on an ongoing
basis to determine whether in light of current circumstances an adequate level of
liquidity is being maintained and will consider taking appropriate steps in order to
maintain adequate liquidity if through a change in values net assets or other
circumstances more than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid
assets include securities subject to contractual or other restrictions on resale and other
29 See Form N-1A Item 9 The Commission has taken the position that a fund is concentrated if it invests more than 25 of the value of its total assets in any one industry See eg Investment Company Act Release No 9011 (October 30 1975) 40 FR 54241 (November 21 1975)
30 In reaching liquidity decisions the Adviser may consider the following factors the frequency of trades and quotes for the security the number of dealers wishing to purchase or sell the security and the number of other potential purchasers dealer undertakings to make a market in the security and the nature of the security and the nature of the marketplace in which it trades (eg the time needed to dispose of the security the method of soliciting offers and the mechanics of transfer)
SR-NASDAQ-2015-011 Amendment No 2 Page 44 of 64
instruments that lack readily available markets as determined in accordance with
Commission staff guidance31
The Fund will not invest in non-US equity securities
Creation and Redemption of Shares
The Fund will issue and redeem Shares on a continuous basis at net asset value
(ldquoNAVrdquo)32 only in large blocks of Shares (ldquoCreation Unitsrdquo) in transactions with
authorized participants generally including broker-dealers and large institutional
investors (ldquoAuthorized Participantsrdquo) Creation Units generally will consist of 50000
Shares although this may change from time to time Creation Units however are not
expected to consist of less than 50000 Shares As described in the Registration
Statement and consistent with the Exemptive Relief the Fund will issue and redeem
Creation Units in exchange for an in-kind portfolio of instruments andor cash in lieu of
31 The Commission has stated that long-standing Commission guidelines have required open-end funds to hold no more than 15 of their net assets in illiquid securities and other illiquid assets See Investment Company Act Release No 28193 (March 11 2008) 73 FR 14618 (March 18 2008) footnote 34 See also Investment Company Act Release No 5847 (October 21 1969) 35 FR 19989 (December 31 1970) (Statement Regarding ldquoRestricted Securitiesrdquo) Investment Company Act Release No 18612 (March 12 1992) 57 FR 9828 (March 20 1992) (Revisions of Guidelines to Form N-1A) A fundrsquos portfolio security is illiquid if it cannot be disposed of in the ordinary course of business within seven days at approximately the value ascribed to it by the fund See Investment Company Act Release No 14983 (March 12 1986) 51 FR 9773 (March 21 1986) (adopting amendments to Rule 2a-7 under the 1940 Act) Investment Company Act Release No 17452 (April 23 1990) 55 FR 17933 (April 30 1990) (adopting Rule 144A under the Securities Act of 1933)
32 The NAV of the Fundrsquos Shares generally will be calculated once daily Monday through Friday as of the close of regular trading on the New York Stock Exchange generally 400 pm Eastern Time (the ldquoNAV Calculation Timerdquo) NAV per Share will be calculated by dividing the Fundrsquos net assets by the number of Fund Shares outstanding For more information regarding the valuation of Fund investments in calculating the Fundrsquos NAV see the Registration Statement
SR-NASDAQ-2015-011 Amendment No 2 Page 45 of 64
such instruments (the ldquoCreation Basketrdquo) In addition if there is a difference between the
NAV attributable to a Creation Unit and the market value of the Creation Basket
exchanged for the Creation Unit the party conveying instruments with the lower value
will pay to the other an amount in cash equal to the difference (referred to as the ldquoCash
Componentrdquo)
Creations and redemptions must be made by or through an Authorized Participant
that has executed an agreement that has been agreed to by the Distributor and BNY with
respect to creations and redemptions of Creation Units All standard orders to create
Creation Units must be received by the transfer agent no later than the closing time of the
regular trading session on the New York Stock Exchange (ordinarily 400 pm Eastern
Time) (the ldquoClosing Timerdquo) in each case on the date such order is placed in order for the
creation of Creation Units to be effected based on the NAV of Shares as next determined
on such date after receipt of the order in proper form Shares may be redeemed only in
Creation Units at their NAV next determined after receipt not later than the Closing Time
of a redemption request in proper form by the Fund through the transfer agent and only
on a business day
The Fundrsquos custodian through the National Securities Clearing Corporation will
make available on each business day prior to the opening of business of the Exchange
the list of the names and quantities of the instruments comprising the Creation Basket as
well as the estimated Cash Component (if any) for that day The published Creation
Basket will apply until a new Creation Basket is announced on the following business
day prior to commencement of trading in the Shares
SR-NASDAQ-2015-011 Amendment No 2 Page 46 of 64
Net Asset Value
The Fundrsquos NAV will be determined as of the close of trading (normally
400 pm Eastern Time) on each day the New York Stock Exchange is open for
business NAV will be calculated for the Fund by taking the market price of the Fundrsquos
total assets including interest or dividends accrued but not yet collected less all
liabilities and dividing such amount by the total number of Shares outstanding The
result rounded to the nearest cent will be the NAV per Share All valuations will be
subject to review by the Board of Trustees of the Trust (ldquoTrust Boardrdquo) or its delegate
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with valuation procedures (which may be revised from time to time) adopted by the Trust
Board (the ldquoValuation Proceduresrdquo) and in accordance with the 1940 Act A market
valuation generally means a valuation (i) obtained from an exchange an independent
pricing service (ldquoPricing Servicerdquo) or a major market maker (or dealer) or (ii) based on a
price quotation or other equivalent indication of value supplied by an exchange a Pricing
Service or a major market maker (or dealer) The information summarized below is
based on the Valuation Procedures as currently in effect however as noted above the
Valuation Procedures are amended from time to time and therefore such information is
subject to change
Certain securities including Floating Rate Debt Instruments in which the Fund
may invest will not be listed on any securities exchange or board of trade Such
securities will typically be bought and sold by institutional investors in individually
negotiated private transactions that function in many respects like an over-the-counter
SR-NASDAQ-2015-011 Amendment No 2 Page 47 of 64
secondary market although typically no formal market makers will exist Certain
securities particularly debt securities will have few or no trades or trade infrequently
and information regarding a specific security may not be widely available or may be
incomplete Accordingly determinations of the fair value of debt securities may be
based on infrequent and dated information Because there is less reliable objective data
available elements of judgment may play a greater role in valuation of debt securities
than for other types of securities Typically Floating Rate Debt Instruments and other
debt securities in which the Fund may invest (other than those described below) will be
valued using information provided by a Pricing Service Debt securities having a
remaining maturity of 60 days or less when purchased will be valued at cost adjusted for
amortization of premiums and accretion of discounts provided the Adviserrsquos pricing
committee (the ldquoPricing Committeerdquo) has determined that the use of amortized cost is an
appropriate reflection of fair value given market and issuer-specific conditions existing at
the time of the determination Overnight repurchase agreements will be valued at cost
and term repurchase agreements (ie those whose maturity exceeds seven days) will be
valued at the average of the bid quotations obtained daily from at least two recognized
dealers
Asset-backed and mortgage-backed securities will generally be valued by using a
Pricing Service If a Pricing Service does not cover a particular asset-backed or
mortgage-backed security or discontinues covering a particular asset-backed or
mortgage-backed security the security will be priced using broker quotes generally
provided by brokers that make or participate in markets in the security To derive values
Pricing Services and broker-dealers may use matrix pricing and valuation models as well
SR-NASDAQ-2015-011 Amendment No 2 Page 48 of 64
as recent market transactions for the same or similar assets As it deems appropriate the
Pricing Committee may determine that a Pricing Service price does not represent an
accurate value of an asset-backed or mortgage-backed security based on broker quotes it
receives a recent trade in the security by the Fund information from a portfolio manager
or other market information In the event that the Pricing Committee determines that the
Pricing Service price is unreliable or inaccurate based on such other information broker
quotes may be used Additionally if the Pricing Committee determines that the price of
an asset-backed or mortgage-backed security obtained from a Pricing Service and
available broker quotes is unreliable or inaccurate due to market conditions or other
reasons or if a Pricing Service price or broker quote is unavailable the security will be
valued using fair value pricing as described below
Equity securities listed on any exchange other than the Exchange will be valued at
the last sale price on the exchange on which they are principally traded on the business
day as of which such value is being determined Equity securities listed on the Exchange
will be valued at the official closing price on the business day as of which such value is
being determined If there has been no sale on such day or no official closing price in
the case of securities traded on the Exchange the securities will be valued using fair
value pricing as described below Equity securities traded on more than one securities
exchange will be valued at the last sale price or official closing price as applicable on
the business day as of which such value is being determined at the close of the exchange
representing the principal market for such securities
Exchange-traded options and futures contracts will be valued at the closing price
in the market where such contracts are principally traded
SR-NASDAQ-2015-011 Amendment No 2 Page 49 of 64
Certain securities including Floating Rate Debt Instruments in which the Fund
will invest will not be able to be priced by pre-established pricing methods Such
securities may be valued by the Trust Board or its delegate at fair value The use of fair
value pricing by the Fund will be governed by the Valuation Procedures and conducted in
accordance with the provisions of the 1940 Act Valuing the Fundrsquos securities using fair
value pricing will result in using prices for those securities that may differ from current
market valuations or official closing prices on the applicable exchange
Availability of Information
The Fundrsquos website (wwwftportfolioscom) which will be publicly available
prior to the public offering of Shares will include a form of the prospectus for the Fund
that may be downloaded The website will include the Sharesrsquo ticker CUSIP and
exchange information along with additional quantitative information updated on a daily
basis including for the Fund (1) daily trading volume the prior business dayrsquos reported
NAV and closing price mid-point of the bidask spread at the time of calculation of such
NAV (the ldquoBidAsk Pricerdquo)33 and a calculation of the premium and discount of the
BidAsk Price against the NAV and (2) data in chart format displaying the frequency
distribution of discounts and premiums of the daily BidAsk Price against the NAV
within appropriate ranges for each of the four previous calendar quarters On each
business day before commencement of trading in Shares in the Regular Market Session34
33 The BidAsk Price of the Fund will be determined using the mid-point of the highest bid and the lowest offer on the Exchange as of the time of calculation of the Fundrsquos NAV The records relating to BidAsk Prices will be retained by the Fund and its service providers
34 See Nasdaq Rule 4120(b)(4) (describing the three trading sessions on the Exchange (1) Pre-Market Session from 4 am to 930 am Eastern Time (2)
SR-NASDAQ-2015-011 Amendment No 2 Page 50 of 64
on the Exchange the Fund will disclose on its website the identities and quantities of the
portfolio of securities and other assets (the ldquoDisclosed Portfoliordquo as defined in Nasdaq
Rule 5735(c)(2)) held by the Fund that will form the basis for the Fundrsquos calculation of
NAV at the end of the business day 35 The Fundrsquos disclosure of derivative positions in
the Disclosed Portfolio will include information that market participants can use to value
these positions intraday On a daily basis the Fund will disclose on the Fundrsquos website
the following information regarding each portfolio holding as applicable to the type of
holding ticker symbol CUSIP number or other identifier if any a description of the
holding (including the type of holding) the identity of the security or other asset or
instrument underlying the holding if any for options the option strike price quantity
held (as measured by for example par value notional value or number of shares
contracts or units) maturity date if any coupon rate if any effective date if any market
value of the holding and percentage weighting of the holding in the Fundrsquos portfolio
The website information will be publicly available at no charge
In addition for the Fund an estimated value defined in Rule 5735(c)(3) as the
ldquoIntraday Indicative Valuerdquo that reflects an estimated intraday value of the Fundrsquos
Disclosed Portfolio will be disseminated Moreover the Intraday Indicative Value
Regular Market Session from 930 am to 4 pm or 415 pm Eastern Time and (3) Post-Market Session from 4 pm or 415 pm to 8 pm Eastern Time)
Under accounting procedures to be followed by the Fund trades made on the prior business day (ldquoTrdquo) will be booked and reflected in NAV on the current business day (ldquoT+1rdquo) Accordingly the Fund will be able to disclose at the beginning of the business day the portfolio that will form the basis for the NAV calculation at the end of the business day
35
SR-NASDAQ-2015-011 Amendment No 2 Page 51 of 64
available on the NASDAQ OMX Information LLC proprietary index data service36 will
be based upon the current value for the components of the Disclosed Portfolio and will be
updated and widely disseminated by one or more major market data vendors and broadly
displayed at least every 15 seconds during the Regular Market Session The Intraday
Indicative Value will be based on quotes and closing prices from the securitiesrsquo local
market and may not reflect events that occur subsequent to the local marketrsquos close
Premiums and discounts between the Intraday Indicative Value and the market price may
occur This should not be viewed as a ldquoreal timerdquo update of the NAV per Share of the
Fund which is calculated only once a day
The dissemination of the Intraday Indicative Value together with the Disclosed
Portfolio will allow investors to determine the value of the underlying portfolio of the
Fund on a daily basis and will provide a close estimate of that value throughout the
trading day
Investors will also be able to obtain the Fundrsquos Statement of Additional
Information (ldquoSAIrdquo) the Fundrsquos annual and semi-annual reports (together ldquoShareholder
Reportsrdquo) and its Form N-CSR and Form N-SAR filed twice a year The Fundrsquos SAI
and Shareholder Reports will be available free upon request from the Fund and those
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or
downloaded from the Commissionrsquos website at wwwsecgov Information regarding
Currently the NASDAQ OMX Global Index Data Service (ldquoGIDSrdquo) is the NASDAQ OMX global index data feed service offering real-time updates daily summary messages and access to widely followed indexes and Intraday Indicative Values for ETFs GIDS provides investment professionals with the daily information needed to track or trade NASDAQ OMX indexes listed ETFs or third-party partner indexes and ETFs
36
SR-NASDAQ-2015-011 Amendment No 2 Page 52 of 64
market price and trading volume of the Shares will be continually available on a real-time
basis throughout the day on brokersrsquo computer screens and other electronic services
Information regarding the previous dayrsquos closing price and trading volume information
for the Shares will be published daily in the financial section of newspapers Quotation
and last sale information for the Shares will be available via Nasdaq proprietary quote
and trade services as well as in accordance with the Unlisted Trading Privileges and the
Consolidated Tape Association (ldquoCTArdquo) plans for the Shares Quotation and last sale
information for the other ETFs in which the Fund will invest will be available via the
quote and trade services of their respective primary exchanges as well as in accordance
with the Unlisted Trading Privileges and the CTA plans as applicable Quotation and
last sale information for US exchange-traded options will be available via the Options
Price Reporting Authority Intraday executable price quotations on Floating Rate Debt
Instruments and other assets not traded on an exchange will be available from major
broker-dealer firms or market data vendors as well as from automated quotation systems
published or other public sources or online information services Additionally the Trade
Reporting and Compliance Engine (ldquoTRACErdquo) of the Financial Industry Regulatory
Authority (ldquoFINRArdquo) will be a source of price information for corporate bonds
privately-issued securities mortgage-backed securities and asset-backed securities to the
extent transactions in such securities are reported to TRACE37 For exchange-traded
Broker-dealers that are FINRA member firms have an obligation to report transactions in specified debt securities to TRACE to the extent required under applicable FINRA rules Generally such debt securities will have at issuance a maturity that exceeds one calendar year
37
SR-NASDAQ-2015-011 Amendment No 2 Page 53 of 64
assets intraday pricing information will be available directly from the applicable listing
exchange
Additional information regarding the Fund and the Shares including investment
strategies risks creation and redemption procedures fees Fund holdings disclosure
policies distributions and taxes will be included in the Registration Statement
Initial and Continued Listing
The Shares will be subject to Rule 5735 which sets forth the initial and continued
listing criteria applicable to Managed Fund Shares The Exchange represents that for
initial andor continued listing the Fund must be in compliance with Rule 10A-338 under
the Act A minimum of 100000 Shares will be outstanding at the commencement of
trading on the Exchange The Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the NAV and the
Disclosed Portfolio will be made available to all market participants at the same time
Trading Halts
With respect to trading halts the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading in the Shares of the Fund Nasdaq will
halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12) Trading may be
halted because of market conditions or for reasons that in the view of the Exchange
make trading in the Shares inadvisable These may include (1) the extent to which
trading is not occurring in the securities andor the other assets constituting the Disclosed
Portfolio of the Fund or (2) whether other unusual conditions or circumstances
See 17 CFR 24010A-3 38
SR-NASDAQ-2015-011 Amendment No 2 Page 54 of 64
detrimental to the maintenance of a fair and orderly market are present Trading in the
Shares also will be subject to Rule 5735(d)(2)(D) which sets forth circumstances under
which Shares of the Fund may be halted
Trading Rules
Nasdaq deems the Shares to be equity securities thus rendering trading in the
Shares subject to Nasdaqrsquos existing rules governing the trading of equity securities
Nasdaq will allow trading in the Shares from 400 am until 800 pm Eastern Time
The Exchange has appropriate rules to facilitate transactions in the Shares during all
trading sessions As provided in Nasdaq Rule 5735(b)(3) the minimum price variation
for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $001
Surveillance
The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws39 The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities laws
The surveillances referred to above generally focus on detecting securities trading
outside their normal patterns which could be indicative of manipulative or other violative
activity When such situations are detected surveillance analysis follows and
FINRA surveils trading on the Exchange pursuant to a regulatory services agreement The Exchange is responsible for FINRArsquos performance under this regulatory services agreement
39
SR-NASDAQ-2015-011 Amendment No 2 Page 55 of 64
investigations are opened where appropriate to review the behavior of all relevant
parties for all relevant trading violations
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 56 of 64
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
SR-NASDAQ-2015-011 Amendment No 2 Page 57 of 64
2 Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
SR-NASDAQ-2015-011 Amendment No 2 Page 58 of 64
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
SR-NASDAQ-2015-011 Amendment No 2 Page 59 of 64
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
SR-NASDAQ-2015-011 Amendment No 2 Page 60 of 64
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 61 of 64
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
SR-NASDAQ-2015-011 Amendment No 2 Page 62 of 64
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
B Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
C Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received From Members Participants or Others
Written comments were neither solicited nor received
III Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Within 45 days of the date of publication of this notice in the Federal Register or
within such longer period (i) as the Commission may designate up to 90 days of such date
if it finds such longer period to be appropriate and publishes its reasons for so finding or
(ii) as to which the Exchange consents the Commission shall (a) by order approve or
disapprove such proposed rule change or (b) institute proceedings to determine whether
the proposed rule change should be disapproved
SR-NASDAQ-2015-011 Amendment No 2 Page 63 of 64
IV Solicitation of Comments
Interested persons are invited to submit written data views and arguments
concerning the foregoing including whether the proposed rule change is consistent with
the Act Comments may be submitted by any of the following methods
Electronic comments
bull Use the Commissionrsquos Internet comment form
(httpwwwsecgovrulessroshtml) or
bull Send an e-mail to rule-commentssecgov Please include File Number
SR-NASDAQ-2015-011 on the subject line
Paper comments
bull Send paper comments in triplicate to Brent J Fields Secretary Securities and
Exchange Commission Station Place 100 F Street NE Washington DC
20549-9303
All submissions should refer to File Number SR-NASDAQ-2015-011 This file number
should be included on the subject line if e-mail is used To help the Commission process
and review your comments more efficiently please use only one method The
Commission will post all comments on the Commissionrsquos Internet website
httpwwwsecgovrulessroshtml
Copies of the submission all subsequent amendments all written statements with
respect to the proposed rule change that are filed with the Commission and all written
communications relating to the proposed rule change between the Commission and any
person other than those that may be withheld from the public in accordance with the
provisions of 5 USC 552 will be available for website viewing and printing in the
Commissionrsquos Public Reference Room 100 F Street NE Washington DC 20549 on
SR-NASDAQ-2015-011 Amendment No 2 Page 64 of 64
official business days between the hours of 1000 am and 300 pm Copies of the filing
also will be available for inspection and copying at the principal office of Nasdaq All
comments received will be posted without change the Commission does not edit
personal identifying information from submissions You should submit only information
that you wish to make available publicly
All submissions should refer to File Number SR-NASDAQ-2015-011 and should
be submitted on or before [insert date 21 days from publication in the Federal Register]
For the Commission by the Division of Trading and Markets pursuant to
delegated authority41
Kevin M OrsquoNeill Deputy Secretary
17 CFR 20030-3(a)(12) 41
Required fields are shown with yellow backgrounds and asterisks
OMB APPROVAL
OMB Number 3235-0045 Estimated average burden hours per response38
Notice of proposed change pursuant to the Payment Clearing and Settlement Act of 2010
Section 806(e)(1) Section 806(e)(2)
Security-Based Swap Submission pursuant to the Securities Exchange Act of 1934
Section 3C(b)(2)
Exhibit 2 Sent As Paper Document Exhibit 3 Sent As Paper Document
has duly caused this filing to be signed on its behalf by the undersigned thereunto duly authorized
19b-4(f)(6)
19b-4(f)(5)
Provide a brief description of the action (limit 250 characters required when Initial is checked )
(Name ) NOTE Clicking the button at right will digitally sign and lock this form A digital signature is as legally binding as a physical signature and once signed this form cannot be changed
Executive Vice President and General Counsel
(Title )
04152015 Date
Provide the name telephone number and e-mail address of the person on the staff of the self-regulatory organization prepared to respond to questions and comments on the action
Senior Associate General Counsel Title
Contact Information
19b-4(f)(4)
19b-4(f)(2)
19b-4(f)(3)
Extension of Time Period for Commission Action
SECURITIES AND EXCHANGE COMMISSION WASHINGTON DC 20549
Form 19b-4
Withdrawal
Fax (301) 978-8472
Jonathan Last Name
2
Filing by
Pilot
NASDAQ Stock Market
011- 2015
Amendment No (req for Amendments )
File No SR -
Cayne
(301) 978-8493 Telephone
First Name
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934
Section 19(b)(3)(A) Section 19(b)(3)(B) Initial Amendment
Pursuant to Rule 19b-4 under the Securities Exchange Act of 1934
Description
Edward S Knight By
Section 19(b)(2)
19b-4(f)(1)
Page 1 of 64
Rule
Date Expires
Required fields are shown with yellow backgrounds and asterisks
SECURITIES AND EXCHANGE COMMISSION WASHINGTON DC 20549
For complete Form 19b-4 instructions please refer to the EFFS website
Form 19b-4 Information
Add Remove View
The self-regulatory organization must provide all required information presented in a clear and comprehensible manner to enable the public to provide meaningful comment on the proposal and for the Commission to determine whether the proposal is consistent with the Act and applicable rules and regulations under the Act
Exhibit 1 - Notice of Proposed Rule Change
Add Remove View
The Notice section of this Form 19b-4 must comply with the guidelines for publication in the Federal Register as well as any requirements for electronic filing as published by the Commission (if applicable) The Office of the Federal Register (OFR) offers guidance on Federal Register publication requirements in the Federal Register Document Drafting Handbook October 1998 Revision For example all references to the federal securities laws must include the corresponding cite to the United States Code in a footnote All references to SEC rules must include the corresponding cite to the Code of Federal Regulations in a footnote All references to Securities Exchange Act Releases must include the release number release date Federal Register cite Federal Register date and corresponding file number (eg SR-[SRO] -xx-xx) A material failure to comply with these guidelines will result in the proposed rule change being deemed not properly filed See also Rule 0-3 under the Act (17 CFR 2400-3)
Exhibit 1A- Notice of Proposed Rule Change Security-Based Swap Submission or Advance Notice by Clearing Agencies
Add Remove View
The Notice section of this Form 19b-4 must comply with the guidelines for publication in the Federal Register as well as any requirements for electronic filing as published by the Commission (if applicable) The Office of the Federal Register (OFR) offers guidance on Federal Register publication requirements in the Federal Register Document Drafting Handbook October 1998 Revision For example all references to the federal securities laws must include the corresponding cite to the United States Code in a footnote All references to SEC rules must include the corresponding cite to the Code of Federal Regulations in a footnote All references to Securities Exchange Act Releases must include the release number release date Federal Register cite Federal Register date and corresponding file number (eg SR-[SRO] -xx-xx) A material failure to comply with these guidelines will result in the proposed rule change security-based swap submission or advance notice being deemed not properly filed See also Rule 0-3 under the Act (17 CFR 2400-3)
Exhibit Sent As Paper Document
View
Exhibit 2 - Notices Written Comments Transcripts Other Communications
Add Remove
Copies of notices written comments transcripts other communications If such documents cannot be filed electronically in accordance with Instruction F they shall be filed in accordance with Instruction G
Copies of any form report or questionnaire that the self-regulatory organization proposes to use to help implement or operate the proposed rule change or that is referred to by the proposed rule change
Exhibit 3 - Form Report or Questionnaire
Add Remove View
Exhibit Sent As Paper Document
Exhibit 4 - Marked Copies
Add Remove View
The full text shall be marked in any convenient manner to indicate additions to and deletions from the immediately preceding filing The purpose of Exhibit 4 is to permit the staff to identify immediately the changes made from the text of the rule with which it has been working
The self-regulatory organization may choose to attach as Exhibit 5 proposed changes to rule text in place of providing it in Item I and which may otherwise be more easily readable if provided separately from Form 19b-4 Exhibit 5 shall be considered part of the proposed rule change
Exhibit 5 - Proposed Rule Text
Add Remove View
If the self-regulatory organization is amending only part of the text of a lengthy proposed rule change it may with the Commissions permission file only those portions of the text of the proposed rule change in which changes are being made if the filing (ie partial amendment) is clearly understandable on its face Such partial amendment shall be clearly identified and marked to show deletions and additions
Partial Amendment
Add Remove View
SR-NASDAQ-2015-011 Amendment No 2 Page 3 of 64
1 Text of Proposed Rule Change
(a) Pursuant to the provisions of Section 19(b)(1) of the Securities Exchange Act
of 1934 (ldquoActrdquo)1 and Rule 19b-4 thereunder2 The NASDAQ Stock Market LLC
(ldquoNasdaqrdquo or the ldquoExchangerdquo) is filing with the Securities and Exchange Commission
(ldquoCommissionrdquo) a proposed rule change to list and trade the shares of the First Trust
Strategic Floating Rate ETF (the ldquoFundrdquo) of First Trust Exchange-Traded Fund IV (the
ldquoTrustrdquo) under Nasdaq Rule 5735 (ldquoManaged Fund Sharesrdquo) 3 The shares of the Fund
are collectively referred to herein as the ldquoSharesrdquo
(b) and (c) Not applicable
2 Procedures of the Self-Regulatory Organization
The proposed rule change was approved by senior management of the Exchange
pursuant to authority delegated by the Board of Directors of the Exchange (the ldquoBoardrdquo)
on July 17 2013 Exchange staff will advise the Board of any action taken pursuant to
delegated authority No other action by the Exchange is necessary for the filing of the
rule change
1 15 USC 78s(b)(1)
2 17 CFR 24019b-4
3 The Commission approved Nasdaq Rule 5735 in Securities Exchange Act Release No 57962 (June 13 2008) 73 FR 35175 (June 20 2008) (SR-NASDAQ-2008shy039) There are already multiple actively-managed funds listed on the Exchange see eg Securities Exchange Act Release Nos 69464 (April 26 2013) 78 FR 25774 (May 2 2013) (SR-NASDAQ-2013-036) (order approving listing and trading of First Trust Senior Loan Fund) 68972 (February 22 2013) 78 FR 13721 (February 28 2013) (SR-NASDAQ-2012-147) (order approving listing and trading of First Trust High Yield LongShort ETF) 66489 (February 29 2012) 77 FR 13379 (March 6 2012) (SR-NASDAQ-2012-004) (order approving listing and trading of WisdomTree Emerging Markets Corporate Bond Fund) The Exchange believes the proposed rule change raises no significant issues not previously addressed in those prior Commission orders
SR-NASDAQ-2015-011 Amendment No 2 Page 4 of 64
Questions regarding this rule filing may be directed to Jonathan F Cayne Senior
Associate General Counsel The NASDAQ OMX Group at (301) 978-8493 (telephone)
3 Self-Regulatory Organizationrsquos Statement of the Purpose of and Statutory Basis for the Proposed Rule Change
a Purpose
The Exchange proposes to list and trade the Shares of the Fund under Nasdaq
Rule 5735 which governs the listing and trading of Managed Fund Shares4 on the
Exchange The Fund will be an actively-managed exchange-traded fund (ldquoETFrdquo) The
Shares will be offered by the Trust which was established as a Massachusetts business
trust on September 15 20105 The Trust is registered with the Commission as an
investment company and has filed a registration statement on Form N-1A (ldquoRegistration
Statementrdquo) with the Commission 6 The Fund will be a series of the Trust The Fund
4 A Managed Fund Share is a security that represents an interest in an investment company registered under the Investment Company Act of 1940 (15 USC 80ashy1) (the ldquo1940 Actrdquo) organized as an open-end investment company or similar entity that invests in a portfolio of securities selected by its investment adviser consistent with its investment objectives and policies In contrast an open-end investment company that issues Index Fund Shares listed and traded on the Exchange under Nasdaq Rule 5705 seeks to provide investment results that correspond generally to the price and yield performance of a specific foreign or domestic stock index fixed income securities index or combination thereof
5 The Commission has issued an order upon which the Trust may rely granting certain exemptive relief under the 1940 Act See Investment Company Act Release No 30029 (April 10 2012) (File No 812-13795) (the ldquoExemptive Reliefrdquo) In addition the Commission has issued no-action relief upon which the Trust may rely pertaining to the Fundrsquos ability to invest in derivatives notwithstanding certain representations in the application for the Exemptive Relief See Commission No-Action Letter (December 6 2012)
6 See Post-Effective Amendment No 104 to Registration Statement on Form N-1A for the Trust dated January 29 2015 (File Nos 333-174332 and 811-22559) The descriptions of the Fund and the Shares contained herein are based in part on information in the Registration Statement
7
SR-NASDAQ-2015-011 Amendment No 2 Page 5 of 64
intends to qualify each year as a regulated investment company (ldquoRICrdquo) under
Subchapter M of the Internal Revenue Code of 1986 as amended
First Trust Advisors LP will be the investment adviser (ldquoAdviserrdquo) to the Fund
First Trust Portfolios LP (the ldquoDistributorrdquo) will be the principal underwriter and
distributor of the Fundrsquos Shares The Bank of New York Mellon Corporation (ldquoBNYrdquo)
will act as the administrator accounting agent custodian and transfer agent to the Fund
Paragraph (g) of Rule 5735 provides that if the investment adviser to the
investment company issuing Managed Fund Shares is affiliated with a broker-dealer
such investment adviser shall erect a ldquofire wallrdquo between the investment adviser and the
broker-dealer with respect to access to information concerning the composition andor
changes to such investment company portfolio7 In addition paragraph (g) further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio Rule 5735(g) is similar
An investment adviser to an open-end fund is required to be registered under the Investment Advisers Act of 1940 (the ldquoAdvisers Actrdquo) As a result the Adviser and its related personnel are subject to the provisions of Rule 204A-1 under the Advisers Act relating to codes of ethics This Rule requires investment advisers to adopt a code of ethics that reflects the fiduciary nature of the relationship to clients as well as compliance with other applicable securities laws Accordingly procedures designed to prevent the communication and misuse of non-public information by an investment adviser must be consistent with Rule 204A-1 under the Advisers Act In addition Rule 206(4)-7 under the Advisers Act makes it unlawful for an investment adviser to provide investment advice to clients unless such investment adviser has (i) adopted and implemented written policies and procedures reasonably designed to prevent violation by the investment adviser and its supervised persons of the Advisers Act and the Commission rules adopted thereunder (ii) implemented at a minimum an annual review regarding the adequacy of the policies and procedures established pursuant to subparagraph (i) above and the effectiveness of their implementation and (iii) designated an individual (who is a supervised person) responsible for administering the policies and procedures adopted under subparagraph (i) above
SR-NASDAQ-2015-011 Amendment No 2 Page 6 of 64
to Nasdaq Rule 5705(b)(5)(A)(i) however paragraph (g) in connection with the
establishment of a ldquofire wallrdquo between the investment adviser and the broker-dealer
reflects the applicable open-end fundrsquos portfolio not an underlying benchmark index as
is the case with index-based funds The Adviser is not a broker-dealer although it is
affiliated with the Distributor a broker-dealer The Adviser has implemented a fire wall
with respect to its broker-dealer affiliate regarding access to information concerning the
composition andor changes to the portfolio In addition personnel who make decisions
on the Fundrsquos portfolio composition will be subject to procedures designed to prevent the
use and dissemination of material non-public information regarding the Fundrsquos portfolio
In the event (a) the Adviser becomes or becomes newly affiliated with a broker-dealer
or (b) any new adviser or sub-adviser is a registered broker-dealer or becomes affiliated
with another broker-dealer it will implement a fire wall with respect to its relevant
personnel andor such broker-dealer affiliate as applicable regarding access to
information concerning the composition andor changes to the portfolio and will be
subject to procedures designed to prevent the use and dissemination of material
non-public information regarding such portfolio The Fund does not currently intend to
use a sub-adviser
First Trust Strategic Floating Rate ETF
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions8 at least 80 of its
The term ldquounder normal market conditionsrdquo as used herein includes but is not limited to the absence of adverse market economic political or other conditions including extreme volatility or trading halts in the fixed income markets or the financial markets generally operational issues causing dissemination of inaccurate market information or force majeure type events such as systems
8
SR-NASDAQ-2015-011 Amendment No 2 Page 7 of 64
net assets in a portfolio of the following types of floating-rate9 debt instruments issued by
US and non-US public- and private-sector entities floating-rate corporate10 and
government bonds and notes floating-rate agency securities 11 floating-rate instruments
of non-US issuers floating-rate privately-issued securities 12 floating-rate asset-backed
failure natural or man-made disaster act of God armed conflict act of terrorism riot or labor disruption or any similar intervening circumstance For temporary defensive purposes during the initial invest-up period and during periods of high cash inflows or outflows the Fund may depart from its principal investment strategies for example it may hold a higher than normal proportion of its assets in cash During such periods the Fund may not be able to achieve its investment objective The Fund may adopt a defensive strategy when the Adviser believes securities in which the Fund normally invests have elevated risks due to political or economic factors and in other extraordinary circumstances
9 For the avoidance of doubt the term ldquofloating-raterdquo shall also include similar terms such as ldquovariable-raterdquo and ldquoadjustable-raterdquo
10 The Adviser expects that under normal market conditions generally for a corporate bond to be considered as an eligible investment after taking into account such an investment at least 75 of the Fundrsquos net assets that are invested in floating-rate corporate bonds and as described below fixed-rate corporate bonds (in the aggregate) will be comprised of corporate bonds that have at the time of original issuance $100 million or more par amount outstanding
11 ldquoAgency securitiesrdquo for these purposes generally includes securities issued by the following entities Government National Mortgage Association (Ginnie Mae) Federal National Mortgage Association (Fannie Mae) Federal Home Loan Banks (FHLBanks) Federal Home Loan Mortgage Corporation (Freddie Mac) Farm Credit System (FCS) Farm Credit Banks (FCBanks) Student Loan Marketing Association (Sallie Mae) Resolution Funding Corporation (REFCORP) Financing Corporation (FICO) and the Farm Credit System (FCS) Financial Assistance Corporation (FAC) Agency securities can include but are not limited to mortgage-backed securities
12 ldquoPrivately-issued securitiesrdquo for these purposes generally includes Rule 144A securities other than mortgage-backed Rule 144A securities Under normal market conditions privately-issued securities will have at the time of original issuance $100 million or more principal amount outstanding to be considered eligible investments
SR-NASDAQ-2015-011 Amendment No 2 Page 8 of 64
securities 13 floating-rate mortgage-backed securities14 floating-rate loans 15 and
investment companies16 (including investment companies advised by the Adviser) that
13 Asset-backed securities are securities that are backed by a pool of assets The Fund currently intends to invest in asset-backed securities that are consumer asset-backed securities
14 Mortgage-backed securities which are securities that directly or indirectly represent a participation in or are secured by and payable from mortgage loans on real property will consist of (1) residential mortgage-backed securities (ldquoRMBSrdquo) (2) commercial mortgage-backed securities (ldquoCMBSrdquo) (3) stripped mortgage-backed securities (ldquoSMBSrdquo) which are mortgage-backed securities where mortgage payments are divided between paying the loanrsquos principal and paying the loanrsquos interest (4) collateralized mortgage obligations (ldquoCMOsrdquo) and real estate mortgage investment conduits (ldquoREMICsrdquo) which are mortgage-backed securities that are divided into multiple classes with each class being entitled to a different share of the principal and interest payments received from the pool of underlying assets
15 The floating-rate loans in which the Fund will invest will represent amounts borrowed by companies or other entities from banks and other lenders and a significant portion of such floating-rate loans may be rated below investment grade or unrated Floating-rate loans held by the Fund may be senior or subordinate obligations of the borrower and may or may not be secured by collateral First lien senior secured floating-rate loans are referred to herein as ldquosenior loansrdquo Floating-rate loans that are not senior loans (ie unsecured floating-rate loans and secured floating-rate loans that are not first lien floating-rate loans) are referred to herein as ldquojunior loansrdquo The Fund will generally invest in floating-rate loans that the Adviser deems to be liquid with readily available prices notwithstanding the foregoing the Fund may invest in floating-rate loans that are deemed illiquid so long as the Fund complies with the 15 limitation on investments of its net assets in illiquid assets described below under ldquoInvestment Restrictionsrdquo
16 The Fund currently anticipates investing only in registered open-end investment companies that are listed and traded in the US on registered exchanges (ie other ETFs) An ETF is an investment company registered under the 1940 Act that holds a portfolio of securities Many ETFs are designed to track the performance of a securities index including industry sector country and region indexes The Fund may invest in the securities of ETFs in excess of the limits imposed under the 1940 Act pursuant to exemptive orders obtained by other ETFs and their sponsors from the Commission In addition the Fund may invest in the securities of certain investment companies in excess of the limits imposed under the 1940 Act pursuant to an exemptive order obtained by the Trust and the Adviser from the Commission See Investment Company Act Release No 30377
SR-NASDAQ-2015-011 Amendment No 2 Page 9 of 64
invest primarily in the foregoing types of debt instruments17 (collectively ldquoFloating Rate
Debt Instrumentsrdquo)
At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade To be considered
ldquoinvestment graderdquo under normal market conditions rated Floating Rate Debt
Instruments will carry at the time of purchase a rating in the highest four rating
categories of at least one nationally recognized statistical ratings organization
(ldquoNRSROrdquo) (eg BBB- or higher by Standard amp Poorrsquos Ratings Services (ldquoSampPrdquo)
andor Fitch Ratings (ldquoFitchrdquo) or Baa3 or higher by Moodyrsquos Investors Service Inc
(ldquoMoodyrsquosrdquo)18 For unrated securities to be considered ldquoinvestment graderdquo under normal
market conditions such securities will be determined at the time of purchase to be of
comparable quality19 by the Adviser The Fund may invest up to 35 of its net assets in
(February 5 2013) (File No 812-13895) The ETFs in which the Fund may invest include Index Fund Shares (as described in Nasdaq Rule 5705) Portfolio Depository Receipts (as described in Nasdaq Rule 5705) and Managed Fund Shares (as described in Nasdaq Rule 5735) While the Fund may invest in inverse ETFs the Fund will not invest in leveraged or inverse leveraged (eg 2X or -3X) ETFs
17 The liquidity of a security especially in the case of asset-backed and mortgage-backed securities will be a substantial factor in the Fundrsquos security selection process Consistent with the discussion below under ldquoInvestment Restrictionsrdquo the Fund will not purchase any Floating Rate Debt Instruments (including asset-backed securities and mortgage-backed securities) that in the Adviserrsquos opinion are illiquid if as a result more than 15 of the value of the Fundrsquos net assets will be invested in illiquid assets
18 For the avoidance of doubt if a security is rated by multiple NRSROs and receives different ratings the Fund will treat the security as being rated in the highest rating category received from an NRSRO
19 Comparable quality of unrated securities will be determined by the Adviser based on fundamental credit analysis of the unrated security and comparable NRSRO-rated securities On a best efforts basis the Adviser will attempt to make a rating
SR-NASDAQ-2015-011 Amendment No 2 Page 10 of 64
securities that are at the time of investment rated below investment grade by each
NRSRO rating such securities (or securities that are unrated and determined by the
Adviser to be of comparable quality) commonly referred to as ldquohigh yieldrdquo or ldquojunkrdquo
bonds If subsequent to purchase by the Fund a security held by the Fund experiences a
decline in credit quality and falls below investment grade the Fund may continue to hold
the security and it will not cause the Fund to violate the 35 investment limitation
however the security will be taken into account for purposes of determining whether
purchases of additional securities will cause the Fund to violate such limitation
The Fund will limit its investments in asset-backed securities (excluding agency
mortgage-backed securities) and non-agency mortgage-backed securities (in the
aggregate) to 20 of its net assets20 In addition the Fund will limit its investments in
junior loans to 20 of its net assets
The Fund will hold debt securities (including in the aggregate Floating Rate
Debt Instruments and the fixed-rate debt securities described below) of at least 13
non-affiliated issuers
Other Investments
Under normal market conditions the Fund will invest primarily in the Floating
Rate Debt Instruments described above to meet its investment objective In addition the
determination based on publicly available data In making a ldquocomparable qualityrdquo determination the Adviser may consider for example whether the issuer of the security has issued other rated securities the nature and provisions of the relevant security whether the obligations under the relevant security are guaranteed by another entity and the rating of such guarantor (if any) relevant cash flows macroeconomic analysis andor sector or industry analysis
For the avoidance of doubt there is no limitation on the Fundrsquos investments in agency mortgage-backed securities
20
SR-NASDAQ-2015-011 Amendment No 2 Page 11 of 64
Fund may invest up to 20 of its net assets in the following types of fixed-rate debt
securities corporate21 and government bonds and notes agency securities22 instruments
of non-US issuers in developed markets privately-issued securities 23 asset-backed
securities 24 mortgage-backed securities 25 municipal bonds money market securities26
and investment companies27 (including investment companies advised by the Adviser)
that invest primarily in the foregoing types of debt securities
Further to pursue its investment objective the Fund may invest up to 20 of the
value of its net assets in exchange-listed options on US Treasury futures contracts and
exchange-listed US Treasury futures contracts28 The use of these derivative
transactions may allow the Fund to obtain net long or short exposures to selected interest
rates These derivatives may also be used to hedge risks including interest rate risks and
21 See footnote 10 above
22 See footnote 11 above
23 See footnote 12 above
24 See footnote 13 above
25 See footnote 14 above
26 ldquoMoney market securitiesrdquo for these purposes generally includes short-term high-quality obligations issued or guaranteed by the US Treasury or the agencies or instrumentalities of the US government short-term high-quality securities issued or guaranteed by non-US governments agencies and instrumentalities repurchase agreements commercial paper (both asset-backed and non-assetshybacked) and deposits and other obligations of US and non-US banks and financial institutions
27 See footnote 16 above
28 At least 90 of the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be invested in instruments that trade in markets that are members of the Intermarket Surveillance Group (ldquoISGrdquo) (see footnote 40 below) or are parties to a comprehensive surveillance sharing agreement with the Exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 12 of 64
credit risks associated with the Fundrsquos portfolio investments The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index
Investment Restrictions
The Fund will not invest 25 or more of the value of its total assets in securities
of issuers in any one industry This restriction does not apply to (a) obligations issued or
guaranteed by the US government its agencies or instrumentalities or (b) securities of
other investment companies29
The Fund may hold up to an aggregate amount of 15 of its net assets in illiquid
assets (calculated at the time of investment) including Rule 144A securities deemed
illiquid by the Adviser30 The Fund will monitor its portfolio liquidity on an ongoing
basis to determine whether in light of current circumstances an adequate level of
liquidity is being maintained and will consider taking appropriate steps in order to
maintain adequate liquidity if through a change in values net assets or other
circumstances more than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid
assets include securities subject to contractual or other restrictions on resale and other
29 See Form N-1A Item 9 The Commission has taken the position that a fund is concentrated if it invests more than 25 of the value of its total assets in any one industry See eg Investment Company Act Release No 9011 (October 30 1975) 40 FR 54241 (November 21 1975)
30 In reaching liquidity decisions the Adviser may consider the following factors the frequency of trades and quotes for the security the number of dealers wishing to purchase or sell the security and the number of other potential purchasers dealer undertakings to make a market in the security and the nature of the security and the nature of the marketplace in which it trades (eg the time needed to dispose of the security the method of soliciting offers and the mechanics of transfer)
SR-NASDAQ-2015-011 Amendment No 2 Page 13 of 64
instruments that lack readily available markets as determined in accordance with
Commission staff guidance31
The Fund will not invest in non-US equity securities
Creation and Redemption of Shares
The Fund will issue and redeem Shares on a continuous basis at net asset value
(ldquoNAVrdquo)32 only in large blocks of Shares (ldquoCreation Unitsrdquo) in transactions with
authorized participants generally including broker-dealers and large institutional
investors (ldquoAuthorized Participantsrdquo) Creation Units generally will consist of 50000
Shares although this may change from time to time Creation Units however are not
expected to consist of less than 50000 Shares As described in the Registration
Statement and consistent with the Exemptive Relief the Fund will issue and redeem
Creation Units in exchange for an in-kind portfolio of instruments andor cash in lieu of
31 The Commission has stated that long-standing Commission guidelines have required open-end funds to hold no more than 15 of their net assets in illiquid securities and other illiquid assets See Investment Company Act Release No 28193 (March 11 2008) 73 FR 14618 (March 18 2008) footnote 34 See also Investment Company Act Release No 5847 (October 21 1969) 35 FR 19989 (December 31 1970) (Statement Regarding ldquoRestricted Securitiesrdquo) Investment Company Act Release No 18612 (March 12 1992) 57 FR 9828 (March 20 1992) (Revisions of Guidelines to Form N-1A) A fundrsquos portfolio security is illiquid if it cannot be disposed of in the ordinary course of business within seven days at approximately the value ascribed to it by the fund See Investment Company Act Release No 14983 (March 12 1986) 51 FR 9773 (March 21 1986) (adopting amendments to Rule 2a-7 under the 1940 Act) Investment Company Act Release No 17452 (April 23 1990) 55 FR 17933 (April 30 1990) (adopting Rule 144A under the Securities Act of 1933)
32 The NAV of the Fundrsquos Shares generally will be calculated once daily Monday through Friday as of the close of regular trading on the New York Stock Exchange generally 400 pm Eastern Time (the ldquoNAV Calculation Timerdquo) NAV per Share will be calculated by dividing the Fundrsquos net assets by the number of Fund Shares outstanding For more information regarding the valuation of Fund investments in calculating the Fundrsquos NAV see the Registration Statement
SR-NASDAQ-2015-011 Amendment No 2 Page 14 of 64
such instruments (the ldquoCreation Basketrdquo) In addition if there is a difference between the
NAV attributable to a Creation Unit and the market value of the Creation Basket
exchanged for the Creation Unit the party conveying instruments with the lower value
will pay to the other an amount in cash equal to the difference (referred to as the ldquoCash
Componentrdquo)
Creations and redemptions must be made by or through an Authorized Participant
that has executed an agreement that has been agreed to by the Distributor and BNY with
respect to creations and redemptions of Creation Units All standard orders to create
Creation Units must be received by the transfer agent no later than the closing time of the
regular trading session on the New York Stock Exchange (ordinarily 400 pm Eastern
Time) (the ldquoClosing Timerdquo) in each case on the date such order is placed in order for the
creation of Creation Units to be effected based on the NAV of Shares as next determined
on such date after receipt of the order in proper form Shares may be redeemed only in
Creation Units at their NAV next determined after receipt not later than the Closing Time
of a redemption request in proper form by the Fund through the transfer agent and only
on a business day
The Fundrsquos custodian through the National Securities Clearing Corporation will
make available on each business day prior to the opening of business of the Exchange
the list of the names and quantities of the instruments comprising the Creation Basket as
well as the estimated Cash Component (if any) for that day The published Creation
Basket will apply until a new Creation Basket is announced on the following business
day prior to commencement of trading in the Shares
SR-NASDAQ-2015-011 Amendment No 2 Page 15 of 64
Net Asset Value
The Fundrsquos NAV will be determined as of the close of trading (normally
400 pm Eastern Time) on each day the New York Stock Exchange is open for
business NAV will be calculated for the Fund by taking the market price of the Fundrsquos
total assets including interest or dividends accrued but not yet collected less all
liabilities and dividing such amount by the total number of Shares outstanding The
result rounded to the nearest cent will be the NAV per Share All valuations will be
subject to review by the Board of Trustees of the Trust (ldquoTrust Boardrdquo) or its delegate
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with valuation procedures (which may be revised from time to time) adopted by the Trust
Board (the ldquoValuation Proceduresrdquo) and in accordance with the 1940 Act A market
valuation generally means a valuation (i) obtained from an exchange an independent
pricing service (ldquoPricing Servicerdquo) or a major market maker (or dealer) or (ii) based on a
price quotation or other equivalent indication of value supplied by an exchange a Pricing
Service or a major market maker (or dealer) The information summarized below is
based on the Valuation Procedures as currently in effect however as noted above the
Valuation Procedures are amended from time to time and therefore such information is
subject to change
Certain securities including Floating Rate Debt Instruments in which the Fund
may invest will not be listed on any securities exchange or board of trade Such
securities will typically be bought and sold by institutional investors in individually
negotiated private transactions that function in many respects like an over-the-counter
SR-NASDAQ-2015-011 Amendment No 2 Page 16 of 64
secondary market although typically no formal market makers will exist Certain
securities particularly debt securities will have few or no trades or trade infrequently
and information regarding a specific security may not be widely available or may be
incomplete Accordingly determinations of the fair value of debt securities may be
based on infrequent and dated information Because there is less reliable objective data
available elements of judgment may play a greater role in valuation of debt securities
than for other types of securities Typically Floating Rate Debt Instruments and other
debt securities in which the Fund may invest (other than those described below) will be
valued using information provided by a Pricing Service Debt securities having a
remaining maturity of 60 days or less when purchased will be valued at cost adjusted for
amortization of premiums and accretion of discounts provided the Adviserrsquos pricing
committee (the ldquoPricing Committeerdquo) has determined that the use of amortized cost is an
appropriate reflection of fair value given market and issuer-specific conditions existing at
the time of the determination Overnight repurchase agreements will be valued at cost
and term repurchase agreements (ie those whose maturity exceeds seven days) will be
valued at the average of the bid quotations obtained daily from at least two recognized
dealers
Asset-backed and mortgage-backed securities will generally be valued by using a
Pricing Service If a Pricing Service does not cover a particular asset-backed or
mortgage-backed security or discontinues covering a particular asset-backed or
mortgage-backed security the security will be priced using broker quotes generally
provided by brokers that make or participate in markets in the security To derive values
Pricing Services and broker-dealers may use matrix pricing and valuation models as well
SR-NASDAQ-2015-011 Amendment No 2 Page 17 of 64
as recent market transactions for the same or similar assets As it deems appropriate the
Pricing Committee may determine that a Pricing Service price does not represent an
accurate value of an asset-backed or mortgage-backed security based on broker quotes it
receives a recent trade in the security by the Fund information from a portfolio manager
or other market information In the event that the Pricing Committee determines that the
Pricing Service price is unreliable or inaccurate based on such other information broker
quotes may be used Additionally if the Pricing Committee determines that the price of
an asset-backed or mortgage-backed security obtained from a Pricing Service and
available broker quotes is unreliable or inaccurate due to market conditions or other
reasons or if a Pricing Service price or broker quote is unavailable the security will be
valued using fair value pricing as described below
Equity securities listed on any exchange other than the Exchange will be valued at
the last sale price on the exchange on which they are principally traded on the business
day as of which such value is being determined Equity securities listed on the Exchange
will be valued at the official closing price on the business day as of which such value is
being determined If there has been no sale on such day or no official closing price in
the case of securities traded on the Exchange the securities will be valued using fair
value pricing as described below Equity securities traded on more than one securities
exchange will be valued at the last sale price or official closing price as applicable on
the business day as of which such value is being determined at the close of the exchange
representing the principal market for such securities
Exchange-traded options and futures contracts will be valued at the closing price
in the market where such contracts are principally traded
SR-NASDAQ-2015-011 Amendment No 2 Page 18 of 64
Certain securities including Floating Rate Debt Instruments in which the Fund
will invest will not be able to be priced by pre-established pricing methods Such
securities may be valued by the Trust Board or its delegate at fair value The use of fair
value pricing by the Fund will be governed by the Valuation Procedures and conducted in
accordance with the provisions of the 1940 Act Valuing the Fundrsquos securities using fair
value pricing will result in using prices for those securities that may differ from current
market valuations or official closing prices on the applicable exchange
Availability of Information
The Fundrsquos website (wwwftportfolioscom) which will be publicly available
prior to the public offering of Shares will include a form of the prospectus for the Fund
that may be downloaded The website will include the Sharesrsquo ticker CUSIP and
exchange information along with additional quantitative information updated on a daily
basis including for the Fund (1) daily trading volume the prior business dayrsquos reported
NAV and closing price mid-point of the bidask spread at the time of calculation of such
NAV (the ldquoBidAsk Pricerdquo)33 and a calculation of the premium and discount of the
BidAsk Price against the NAV and (2) data in chart format displaying the frequency
distribution of discounts and premiums of the daily BidAsk Price against the NAV
within appropriate ranges for each of the four previous calendar quarters On each
business day before commencement of trading in Shares in the Regular Market Session34
33 The BidAsk Price of the Fund will be determined using the mid-point of the highest bid and the lowest offer on the Exchange as of the time of calculation of the Fundrsquos NAV The records relating to BidAsk Prices will be retained by the Fund and its service providers
34 See Nasdaq Rule 4120(b)(4) (describing the three trading sessions on the Exchange (1) Pre-Market Session from 4 am to 930 am Eastern Time (2)
SR-NASDAQ-2015-011 Amendment No 2 Page 19 of 64
on the Exchange the Fund will disclose on its website the identities and quantities of the
portfolio of securities and other assets (the ldquoDisclosed Portfoliordquo as defined in Nasdaq
Rule 5735(c)(2)) held by the Fund that will form the basis for the Fundrsquos calculation of
NAV at the end of the business day 35 The Fundrsquos disclosure of derivative positions in
the Disclosed Portfolio will include information that market participants can use to value
these positions intraday On a daily basis the Fund will disclose on the Fundrsquos website
the following information regarding each portfolio holding as applicable to the type of
holding ticker symbol CUSIP number or other identifier if any a description of the
holding (including the type of holding) the identity of the security or other asset or
instrument underlying the holding if any for options the option strike price quantity
held (as measured by for example par value notional value or number of shares
contracts or units) maturity date if any coupon rate if any effective date if any market
value of the holding and percentage weighting of the holding in the Fundrsquos portfolio
The website information will be publicly available at no charge
In addition for the Fund an estimated value defined in Rule 5735(c)(3) as the
ldquoIntraday Indicative Valuerdquo that reflects an estimated intraday value of the Fundrsquos
Disclosed Portfolio will be disseminated Moreover the Intraday Indicative Value
Regular Market Session from 930 am to 4 pm or 415 pm Eastern Time and (3) Post-Market Session from 4 pm or 415 pm to 8 pm Eastern Time)
Under accounting procedures to be followed by the Fund trades made on the prior business day (ldquoTrdquo) will be booked and reflected in NAV on the current business day (ldquoT+1rdquo) Accordingly the Fund will be able to disclose at the beginning of the business day the portfolio that will form the basis for the NAV calculation at the end of the business day
35
SR-NASDAQ-2015-011 Amendment No 2 Page 20 of 64
available on the NASDAQ OMX Information LLC proprietary index data service36 will
be based upon the current value for the components of the Disclosed Portfolio and will be
updated and widely disseminated by one or more major market data vendors and broadly
displayed at least every 15 seconds during the Regular Market Session The Intraday
Indicative Value will be based on quotes and closing prices from the securitiesrsquo local
market and may not reflect events that occur subsequent to the local marketrsquos close
Premiums and discounts between the Intraday Indicative Value and the market price may
occur This should not be viewed as a ldquoreal timerdquo update of the NAV per Share of the
Fund which is calculated only once a day
The dissemination of the Intraday Indicative Value together with the Disclosed
Portfolio will allow investors to determine the value of the underlying portfolio of the
Fund on a daily basis and will provide a close estimate of that value throughout the
trading day
Investors will also be able to obtain the Fundrsquos Statement of Additional
Information (ldquoSAIrdquo) the Fundrsquos annual and semi-annual reports (together ldquoShareholder
Reportsrdquo) and its Form N-CSR and Form N-SAR filed twice a year The Fundrsquos SAI
and Shareholder Reports will be available free upon request from the Fund and those
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or
downloaded from the Commissionrsquos website at wwwsecgov Information regarding
market price and trading volume of the Shares will be continually available on a real-time
Currently the NASDAQ OMX Global Index Data Service (ldquoGIDSrdquo) is the NASDAQ OMX global index data feed service offering real-time updates daily summary messages and access to widely followed indexes and Intraday Indicative Values for ETFs GIDS provides investment professionals with the daily information needed to track or trade NASDAQ OMX indexes listed ETFs or third-party partner indexes and ETFs
36
SR-NASDAQ-2015-011 Amendment No 2 Page 21 of 64
basis throughout the day on brokersrsquo computer screens and other electronic services
Information regarding the previous dayrsquos closing price and trading volume information
for the Shares will be published daily in the financial section of newspapers Quotation
and last sale information for the Shares will be available via Nasdaq proprietary quote
and trade services as well as in accordance with the Unlisted Trading Privileges and the
Consolidated Tape Association (ldquoCTArdquo) plans for the Shares Quotation and last sale
information for the other ETFs in which the Fund will invest will be available via the
quote and trade services of their respective primary exchanges as well as in accordance
with the Unlisted Trading Privileges and the CTA plans as applicable Quotation and
last sale information for US exchange-traded options will be available via the Options
Price Reporting Authority Intraday executable price quotations on Floating Rate Debt
Instruments and other assets not traded on an exchange will be available from major
broker-dealer firms or market data vendors as well as from automated quotation systems
published or other public sources or online information services Additionally the Trade
Reporting and Compliance Engine (ldquoTRACErdquo) of the Financial Industry Regulatory
Authority (ldquoFINRArdquo) will be a source of price information for corporate bonds
privately-issued securities mortgage-backed securities and asset-backed securities to the
extent transactions in such securities are reported to TRACE37 For exchange-traded
assets intraday pricing information will be available directly from the applicable listing
exchange
Broker-dealers that are FINRA member firms have an obligation to report transactions in specified debt securities to TRACE to the extent required under applicable FINRA rules Generally such debt securities will have at issuance a maturity that exceeds one calendar year
37
SR-NASDAQ-2015-011 Amendment No 2 Page 22 of 64
Additional information regarding the Fund and the Shares including investment
strategies risks creation and redemption procedures fees Fund holdings disclosure
policies distributions and taxes will be included in the Registration Statement
Initial and Continued Listing
The Shares will be subject to Rule 5735 which sets forth the initial and continued
listing criteria applicable to Managed Fund Shares The Exchange represents that for
initial andor continued listing the Fund must be in compliance with Rule 10A-338 under
the Act A minimum of 100000 Shares will be outstanding at the commencement of
trading on the Exchange The Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the NAV and the
Disclosed Portfolio will be made available to all market participants at the same time
Trading Halts
With respect to trading halts the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading in the Shares of the Fund Nasdaq will
halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12) Trading may be
halted because of market conditions or for reasons that in the view of the Exchange
make trading in the Shares inadvisable These may include (1) the extent to which
trading is not occurring in the securities andor the other assets constituting the Disclosed
Portfolio of the Fund or (2) whether other unusual conditions or circumstances
detrimental to the maintenance of a fair and orderly market are present Trading in the
See 17 CFR 24010A-3 38
SR-NASDAQ-2015-011 Amendment No 2 Page 23 of 64
Shares also will be subject to Rule 5735(d)(2)(D) which sets forth circumstances under
which Shares of the Fund may be halted
Trading Rules
Nasdaq deems the Shares to be equity securities thus rendering trading in the
Shares subject to Nasdaqrsquos existing rules governing the trading of equity securities
Nasdaq will allow trading in the Shares from 400 am until 800 pm Eastern Time
The Exchange has appropriate rules to facilitate transactions in the Shares during all
trading sessions As provided in Nasdaq Rule 5735(b)(3) the minimum price variation
for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $001
Surveillance
The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws39 The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities laws
The surveillances referred to above generally focus on detecting securities trading
outside their normal patterns which could be indicative of manipulative or other violative
activity When such situations are detected surveillance analysis follows and
investigations are opened where appropriate to review the behavior of all relevant
parties for all relevant trading violations
FINRA surveils trading on the Exchange pursuant to a regulatory services agreement The Exchange is responsible for FINRArsquos performance under this regulatory services agreement
39
SR-NASDAQ-2015-011 Amendment No 2 Page 24 of 64
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 25 of 64
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
b Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
SR-NASDAQ-2015-011 Amendment No 2 Page 26 of 64
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
SR-NASDAQ-2015-011 Amendment No 2 Page 27 of 64
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
SR-NASDAQ-2015-011 Amendment No 2 Page 28 of 64
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
SR-NASDAQ-2015-011 Amendment No 2 Page 29 of 64
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
SR-NASDAQ-2015-011 Amendment No 2 Page 30 of 64
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
SR-NASDAQ-2015-011 Amendment No 2 Page 31 of 64
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
4 Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
5 Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received from Members Participants or Others
Written comments were neither solicited nor received
6 Extension of Time Period for Commission Action
The Exchange does not consent at this time to an extension of any time period for
Commission action
7 Basis for Summary Effectiveness Pursuant to Section 19(b)(3) or for Accelerated Effectiveness Pursuant to Section 19(b)(2)
Not applicable
8 Proposed Rule Change Based on Rules of Another Self-Regulatory Organization or of the Commission
Not applicable
9 Security-Based Swap Submissions Filed Pursuant to Section 3C of the Act
Not applicable
SR-NASDAQ-2015-011 Amendment No 2 Page 32 of 64
10 Advance Notices Filed Pursuant to Section 806(e) of the Payment Clearing and Settlement Supervision Act
Not applicable
11 Exhibits
1 Completed notice of proposed rule change for publication in the Federal
Register
SR-NASDAQ-2015-011 Amendment No 2 Page 33 of 64
EXHIBIT 1
SECURITIES AND EXCHANGE COMMISSION (Release No 34shy File No SR-NASDAQ-2015-011)
April __ 2015
Self-Regulatory Organizations The NASDAQ Stock Market LLC Notice of Filing of Proposed Rule Change Relating to the Listing and Trading of the Shares of the First Trust Strategic Floating Rate ETF of First Trust Exchange-Traded Fund IV
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (ldquoActrdquo)1 and
Rule 19b-4 thereunder2 notice is hereby given that on February 12 2015 The NASDAQ
Stock Market LLC (ldquoNasdaqrdquo or the ldquoExchangerdquo) filed with the Securities and Exchange
Commission (ldquoCommissionrdquo) the proposed rule change as described in in Items I II and
III below which Items have been prepared by Nasdaq On April 6 2015 Nasdaq filed
Amendment No 1 which replaced the text of the original filing in its entirety On April
15 2015 Nasdaq filed Amendment No 2 which replaced the text of the original filing in
its entirety The Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons
I Self-Regulatory Organizationrsquos Statement of the Terms of Substance of the Proposed Rule Change
Nasdaq proposes to list and trade the shares of the First Trust Strategic Floating
Rate ETF (the ldquoFundrdquo) of the First Trust Strategic Floating Rate ETF (the ldquoFundrdquo) of
First Trust Exchange-Traded Fund IV (the ldquoTrustrdquo) under Nasdaq Rule 5735 (ldquoManaged
1 15 USC 78s(b)(1)
2 17 CFR 24019b-4
SR-NASDAQ-2015-011 Amendment No 2 Page 34 of 64
Fund Sharesrdquo)3 The shares of the Fund are collectively referred to herein as the
ldquoSharesrdquo
The text of the proposed rule change is available at
httpnasdaqcchwallstreetcom at Nasdaqrsquos principal office and at the Commissionrsquos
Public Reference Room
II Self-Regulatory Organizationrsquos Statement of the Purpose of and Statutory Basis for the Proposed Rule Change
In its filing with the Commission Nasdaq included statements concerning the
purpose of and basis for the proposed rule change The text of these statements may be
examined at the places specified in Item IV below Nasdaq has prepared summaries set
forth in Sections A B and C below of the most significant aspects of such statements
A Self-Regulatory Organizationrsquos Statement of the Purpose of and Statutory Basis for the Proposed Rule Change
1 Purpose
The Exchange proposes to list and trade the Shares of the Fund under Nasdaq
Rule 5735 which governs the listing and trading of Managed Fund Shares4 on the
3 The Commission approved Nasdaq Rule 5735 in Securities Exchange Act Release No 57962 (June 13 2008) 73 FR 35175 (June 20 2008) (SR-NASDAQ-2008shy039) There are already multiple actively-managed funds listed on the Exchange see eg Securities Exchange Act Release Nos 69464 (April 26 2013) 78 FR 25774 (May 2 2013) (SR-NASDAQ-2013-036) (order approving listing and trading of First Trust Senior Loan Fund) 68972 (February 22 2013) 78 FR 13721 (February 28 2013) (SR-NASDAQ-2012-147) (order approving listing and trading of First Trust High Yield LongShort ETF) 66489 (February 29 2012) 77 FR 13379 (March 6 2012) (SR-NASDAQ-2012-004) (order approving listing and trading of WisdomTree Emerging Markets Corporate Bond Fund) The Exchange believes the proposed rule change raises no significant issues not previously addressed in those prior Commission orders
4 A Managed Fund Share is a security that represents an interest in an investment company registered under the Investment Company Act of 1940 (15 USC 80ashy
SR-NASDAQ-2015-011 Amendment No 2 Page 35 of 64
Exchange The Fund will be an actively-managed exchange-traded fund (ldquoETFrdquo) The
Shares will be offered by the Trust which was established as a Massachusetts business
trust on September 15 20105 The Trust is registered with the Commission as an
investment company and has filed a registration statement on Form N-1A (ldquoRegistration
Statementrdquo) with the Commission6 The Fund will be a series of the Trust The Fund
intends to qualify each year as a regulated investment company (ldquoRICrdquo) under
Subchapter M of the Internal Revenue Code of 1986 as amended
First Trust Advisors LP will be the investment adviser (ldquoAdviserrdquo) to the Fund
First Trust Portfolios LP (the ldquoDistributorrdquo) will be the principal underwriter and
distributor of the Fundrsquos Shares The Bank of New York Mellon Corporation (ldquoBNYrdquo)
will act as the administrator accounting agent custodian and transfer agent to the Fund
1) (the ldquo1940 Actrdquo) organized as an open-end investment company or similar entity that invests in a portfolio of securities selected by its investment adviser consistent with its investment objectives and policies In contrast an open-end investment company that issues Index Fund Shares listed and traded on the Exchange under Nasdaq Rule 5705 seeks to provide investment results that correspond generally to the price and yield performance of a specific foreign or domestic stock index fixed income securities index or combination thereof
5 The Commission has issued an order upon which the Trust may rely granting certain exemptive relief under the 1940 Act See Investment Company Act Release No 30029 (April 10 2012) (File No 812-13795) (the ldquoExemptive Reliefrdquo) In addition the Commission has issued no-action relief upon which the Trust may rely pertaining to the Fundrsquos ability to invest in derivatives notwithstanding certain representations in the application for the Exemptive Relief See Commission No-Action Letter (December 6 2012)
6 See Post-Effective Amendment No 104 to Registration Statement on Form N-1A for the Trust dated January 29 2015 (File Nos 333-174332 and 811-22559) The descriptions of the Fund and the Shares contained herein are based in part on information in the Registration Statement
7
SR-NASDAQ-2015-011 Amendment No 2 Page 36 of 64
Paragraph (g) of Rule 5735 provides that if the investment adviser to the
investment company issuing Managed Fund Shares is affiliated with a broker-dealer
such investment adviser shall erect a ldquofire wallrdquo between the investment adviser and the
broker-dealer with respect to access to information concerning the composition andor
changes to such investment company portfolio7 In addition paragraph (g) further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio Rule 5735(g) is similar
to Nasdaq Rule 5705(b)(5)(A)(i) however paragraph (g) in connection with the
establishment of a ldquofire wallrdquo between the investment adviser and the broker-dealer
reflects the applicable open-end fundrsquos portfolio not an underlying benchmark index as
is the case with index-based funds The Adviser is not a broker-dealer although it is
affiliated with the Distributor a broker-dealer The Adviser has implemented a fire wall
An investment adviser to an open-end fund is required to be registered under the Investment Advisers Act of 1940 (the ldquoAdvisers Actrdquo) As a result the Adviser and its related personnel are subject to the provisions of Rule 204A-1 under the Advisers Act relating to codes of ethics This Rule requires investment advisers to adopt a code of ethics that reflects the fiduciary nature of the relationship to clients as well as compliance with other applicable securities laws Accordingly procedures designed to prevent the communication and misuse of non-public information by an investment adviser must be consistent with Rule 204A-1 under the Advisers Act In addition Rule 206(4)-7 under the Advisers Act makes it unlawful for an investment adviser to provide investment advice to clients unless such investment adviser has (i) adopted and implemented written policies and procedures reasonably designed to prevent violation by the investment adviser and its supervised persons of the Advisers Act and the Commission rules adopted thereunder (ii) implemented at a minimum an annual review regarding the adequacy of the policies and procedures established pursuant to subparagraph (i) above and the effectiveness of their implementation and (iii) designated an individual (who is a supervised person) responsible for administering the policies and procedures adopted under subparagraph (i) above
8
SR-NASDAQ-2015-011 Amendment No 2 Page 37 of 64
with respect to its broker-dealer affiliate regarding access to information concerning the
composition andor changes to the portfolio In addition personnel who make decisions
on the Fundrsquos portfolio composition will be subject to procedures designed to prevent the
use and dissemination of material non-public information regarding the Fundrsquos portfolio
In the event (a) the Adviser becomes or becomes newly affiliated with a broker-dealer
or (b) any new adviser or sub-adviser is a registered broker-dealer or becomes affiliated
with another broker-dealer it will implement a fire wall with respect to its relevant
personnel andor such broker-dealer affiliate as applicable regarding access to
information concerning the composition andor changes to the portfolio and will be
subject to procedures designed to prevent the use and dissemination of material
non-public information regarding such portfolio The Fund does not currently intend to
use a sub-adviser
First Trust Strategic Floating Rate ETF
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions8 at least 80 of its
The term ldquounder normal market conditionsrdquo as used herein includes but is not limited to the absence of adverse market economic political or other conditions including extreme volatility or trading halts in the fixed income markets or the financial markets generally operational issues causing dissemination of inaccurate market information or force majeure type events such as systems failure natural or man-made disaster act of God armed conflict act of terrorism riot or labor disruption or any similar intervening circumstance For temporary defensive purposes during the initial invest-up period and during periods of high cash inflows or outflows the Fund may depart from its principal investment strategies for example it may hold a higher than normal proportion of its assets in cash During such periods the Fund may not be able to achieve its investment objective The Fund may adopt a defensive strategy when the Adviser believes securities in which the Fund normally invests have elevated risks due to political or economic factors and in other extraordinary circumstances
SR-NASDAQ-2015-011 Amendment No 2 Page 38 of 64
net assets in a portfolio of the following types of floating-rate9 debt instruments issued by
US and non-US public- and private-sector entities floating-rate corporate10 and
government bonds and notes floating-rate agency securities 11 floating-rate instruments
of non-US issuers floating-rate privately-issued securities 12 floating-rate asset-backed
securities 13 floating-rate mortgage-backed securities14 floating-rate loans 15 and
9 For the avoidance of doubt the term ldquofloating-raterdquo shall also include similar terms such as ldquovariable-raterdquo and ldquoadjustable-raterdquo
10 The Adviser expects that under normal market conditions generally for a corporate bond to be considered as an eligible investment after taking into account such an investment at least 75 of the Fundrsquos net assets that are invested in floating-rate corporate bonds and as described below fixed-rate corporate bonds (in the aggregate) will be comprised of corporate bonds that have at the time of original issuance $100 million or more par amount outstanding
11 ldquoAgency securitiesrdquo for these purposes generally includes securities issued by the following entities Government National Mortgage Association (Ginnie Mae) Federal National Mortgage Association (Fannie Mae) Federal Home Loan Banks (FHLBanks) Federal Home Loan Mortgage Corporation (Freddie Mac) Farm Credit System (FCS) Farm Credit Banks (FCBanks) Student Loan Marketing Association (Sallie Mae) Resolution Funding Corporation (REFCORP) Financing Corporation (FICO) and the Farm Credit System (FCS) Financial Assistance Corporation (FAC) Agency securities can include but are not limited to mortgage-backed securities
12 ldquoPrivately-issued securitiesrdquo for these purposes generally includes Rule 144A securities other than mortgage-backed Rule 144A securities Under normal market conditions privately-issued securities will have at the time of original issuance $100 million or more principal amount outstanding to be considered eligible investments
13 Asset-backed securities are securities that are backed by a pool of assets The Fund currently intends to invest in asset-backed securities that are consumer asset-backed securities
14 Mortgage-backed securities which are securities that directly or indirectly represent a participation in or are secured by and payable from mortgage loans on real property will consist of (1) residential mortgage-backed securities (ldquoRMBSrdquo) (2) commercial mortgage-backed securities (ldquoCMBSrdquo) (3) stripped mortgage-backed securities (ldquoSMBSrdquo) which are mortgage-backed securities
SR-NASDAQ-2015-011 Amendment No 2 Page 39 of 64
investment companies16 (including investment companies advised by the Adviser) that
invest primarily in the foregoing types of debt instruments17 (collectively ldquoFloating Rate
Debt Instrumentsrdquo)
where mortgage payments are divided between paying the loanrsquos principal and paying the loanrsquos interest (4) collateralized mortgage obligations (ldquoCMOsrdquo) and real estate mortgage investment conduits (ldquoREMICsrdquo) which are mortgage-backed securities that are divided into multiple classes with each class being entitled to a different share of the principal and interest payments received from the pool of underlying assets
15 The floating-rate loans in which the Fund will invest will represent amounts borrowed by companies or other entities from banks and other lenders and a significant portion of such floating-rate loans may be rated below investment grade or unrated Floating-rate loans held by the Fund may be senior or subordinate obligations of the borrower and may or may not be secured by collateral First lien senior secured floating-rate loans are referred to herein as ldquosenior loansrdquo Floating-rate loans that are not senior loans (ie unsecured floating-rate loans and secured floating-rate loans that are not first lien floating-rate loans) are referred to herein as ldquojunior loansrdquo The Fund will generally invest in floating-rate loans that the Adviser deems to be liquid with readily available prices notwithstanding the foregoing the Fund may invest in floating-rate loans that are deemed illiquid so long as the Fund complies with the 15 limitation on investments of its net assets in illiquid assets described below under ldquoInvestment Restrictionsrdquo
16 The Fund currently anticipates investing only in registered open-end investment companies that are listed and traded in the US on registered exchanges (ie other ETFs) An ETF is an investment company registered under the 1940 Act that holds a portfolio of securities Many ETFs are designed to track the performance of a securities index including industry sector country and region indexes The Fund may invest in the securities of ETFs in excess of the limits imposed under the 1940 Act pursuant to exemptive orders obtained by other ETFs and their sponsors from the Commission In addition the Fund may invest in the securities of certain investment companies in excess of the limits imposed under the 1940 Act pursuant to an exemptive order obtained by the Trust and the Adviser from the Commission See Investment Company Act Release No 30377 (February 5 2013) (File No 812-13895) The ETFs in which the Fund may invest include Index Fund Shares (as described in Nasdaq Rule 5705) Portfolio Depository Receipts (as described in Nasdaq Rule 5705) and Managed Fund Shares (as described in Nasdaq Rule 5735) While the Fund may invest in inverse ETFs the Fund will not invest in leveraged or inverse leveraged (eg 2X or -3X) ETFs
SR-NASDAQ-2015-011 Amendment No 2 Page 40 of 64
At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade To be considered
ldquoinvestment graderdquo under normal market conditions rated Floating Rate Debt
Instruments will carry at the time of purchase a rating in the highest four rating
categories of at least one nationally recognized statistical ratings organization
(ldquoNRSROrdquo) (eg BBB- or higher by Standard amp Poorrsquos Ratings Services (ldquoSampPrdquo)
andor Fitch Ratings (ldquoFitchrdquo) or Baa3 or higher by Moodyrsquos Investors Service Inc
(ldquoMoodyrsquosrdquo)18 For unrated securities to be considered ldquoinvestment graderdquo under normal
market conditions such securities will be determined at the time of purchase to be of
comparable quality19 by the Adviser The Fund may invest up to 35 of its net assets in
securities that are at the time of investment rated below investment grade by each
NRSRO rating such securities (or securities that are unrated and determined by the
17 The liquidity of a security especially in the case of asset-backed and mortgage-backed securities will be a substantial factor in the Fundrsquos security selection process Consistent with the discussion below under ldquoInvestment Restrictionsrdquo the Fund will not purchase any Floating Rate Debt Instruments (including asset-backed securities and mortgage-backed securities) that in the Adviserrsquos opinion are illiquid if as a result more than 15 of the value of the Fundrsquos net assets will be invested in illiquid assets
18 For the avoidance of doubt if a security is rated by multiple NRSROs and receives different ratings the Fund will treat the security as being rated in the highest rating category received from an NRSRO
19 Comparable quality of unrated securities will be determined by the Adviser based on fundamental credit analysis of the unrated security and comparable NRSRO-rated securities On a best efforts basis the Adviser will attempt to make a rating determination based on publicly available data In making a ldquocomparable qualityrdquo determination the Adviser may consider for example whether the issuer of the security has issued other rated securities the nature and provisions of the relevant security whether the obligations under the relevant security are guaranteed by another entity and the rating of such guarantor (if any) relevant cash flows macroeconomic analysis andor sector or industry analysis
SR-NASDAQ-2015-011 Amendment No 2 Page 41 of 64
Adviser to be of comparable quality) commonly referred to as ldquohigh yieldrdquo or ldquojunkrdquo
bonds If subsequent to purchase by the Fund a security held by the Fund experiences a
decline in credit quality and falls below investment grade the Fund may continue to hold
the security and it will not cause the Fund to violate the 35 investment limitation
however the security will be taken into account for purposes of determining whether
purchases of additional securities will cause the Fund to violate such limitation
The Fund will limit its investments in asset-backed securities (excluding agency
mortgage-backed securities) and non-agency mortgage-backed securities (in the
aggregate) to 20 of its net assets20 In addition the Fund will limit its investments in
junior loans to 20 of its net assets
The Fund will hold debt securities (including in the aggregate Floating Rate
Debt Instruments and the fixed-rate debt securities described below) of at least 13
non-affiliated issuers
Other Investments
Under normal market conditions the Fund will invest primarily in the Floating
Rate Debt Instruments described above to meet its investment objective In addition the
Fund may invest up to 20 of its net assets in the following types of fixed-rate debt
securities corporate21 and government bonds and notes agency securities22 instruments
20 For the avoidance of doubt there is no limitation on the Fundrsquos investments in agency mortgage-backed securities
21 See footnote 10 above
22 See footnote 11 above
SR-NASDAQ-2015-011 Amendment No 2 Page 42 of 64
of non-US issuers in developed markets privately-issued securities 23 asset-backed
securities 24 mortgage-backed securities 25 municipal bonds money market securities26
and investment companies27 (including investment companies advised by the Adviser)
that invest primarily in the foregoing types of debt securities
Further to pursue its investment objective the Fund may invest up to 20 of the
value of its net assets in exchange-listed options on US Treasury futures contracts and
exchange-listed US Treasury futures contracts28 The use of these derivative
transactions may allow the Fund to obtain net long or short exposures to selected interest
rates These derivatives may also be used to hedge risks including interest rate risks and
credit risks associated with the Fundrsquos portfolio investments The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
23 See footnote 12 above
24 See footnote 13 above
25 See footnote 14 above
26 ldquoMoney market securitiesrdquo for these purposes generally includes short-term high-quality obligations issued or guaranteed by the US Treasury or the agencies or instrumentalities of the US government short-term high-quality securities issued or guaranteed by non-US governments agencies and instrumentalities repurchase agreements commercial paper (both asset-backed and non-assetshybacked) and deposits and other obligations of US and non-US banks and financial institutions
27 See footnote 16 above
28 At least 90 of the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be invested in instruments that trade in markets that are members of the Intermarket Surveillance Group (ldquoISGrdquo) (see footnote 40 below) or are parties to a comprehensive surveillance sharing agreement with the Exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 43 of 64
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index
Investment Restrictions
The Fund will not invest 25 or more of the value of its total assets in securities
of issuers in any one industry This restriction does not apply to (a) obligations issued or
guaranteed by the US government its agencies or instrumentalities or (b) securities of
other investment companies29
The Fund may hold up to an aggregate amount of 15 of its net assets in illiquid
assets (calculated at the time of investment) including Rule 144A securities deemed
illiquid by the Adviser30 The Fund will monitor its portfolio liquidity on an ongoing
basis to determine whether in light of current circumstances an adequate level of
liquidity is being maintained and will consider taking appropriate steps in order to
maintain adequate liquidity if through a change in values net assets or other
circumstances more than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid
assets include securities subject to contractual or other restrictions on resale and other
29 See Form N-1A Item 9 The Commission has taken the position that a fund is concentrated if it invests more than 25 of the value of its total assets in any one industry See eg Investment Company Act Release No 9011 (October 30 1975) 40 FR 54241 (November 21 1975)
30 In reaching liquidity decisions the Adviser may consider the following factors the frequency of trades and quotes for the security the number of dealers wishing to purchase or sell the security and the number of other potential purchasers dealer undertakings to make a market in the security and the nature of the security and the nature of the marketplace in which it trades (eg the time needed to dispose of the security the method of soliciting offers and the mechanics of transfer)
SR-NASDAQ-2015-011 Amendment No 2 Page 44 of 64
instruments that lack readily available markets as determined in accordance with
Commission staff guidance31
The Fund will not invest in non-US equity securities
Creation and Redemption of Shares
The Fund will issue and redeem Shares on a continuous basis at net asset value
(ldquoNAVrdquo)32 only in large blocks of Shares (ldquoCreation Unitsrdquo) in transactions with
authorized participants generally including broker-dealers and large institutional
investors (ldquoAuthorized Participantsrdquo) Creation Units generally will consist of 50000
Shares although this may change from time to time Creation Units however are not
expected to consist of less than 50000 Shares As described in the Registration
Statement and consistent with the Exemptive Relief the Fund will issue and redeem
Creation Units in exchange for an in-kind portfolio of instruments andor cash in lieu of
31 The Commission has stated that long-standing Commission guidelines have required open-end funds to hold no more than 15 of their net assets in illiquid securities and other illiquid assets See Investment Company Act Release No 28193 (March 11 2008) 73 FR 14618 (March 18 2008) footnote 34 See also Investment Company Act Release No 5847 (October 21 1969) 35 FR 19989 (December 31 1970) (Statement Regarding ldquoRestricted Securitiesrdquo) Investment Company Act Release No 18612 (March 12 1992) 57 FR 9828 (March 20 1992) (Revisions of Guidelines to Form N-1A) A fundrsquos portfolio security is illiquid if it cannot be disposed of in the ordinary course of business within seven days at approximately the value ascribed to it by the fund See Investment Company Act Release No 14983 (March 12 1986) 51 FR 9773 (March 21 1986) (adopting amendments to Rule 2a-7 under the 1940 Act) Investment Company Act Release No 17452 (April 23 1990) 55 FR 17933 (April 30 1990) (adopting Rule 144A under the Securities Act of 1933)
32 The NAV of the Fundrsquos Shares generally will be calculated once daily Monday through Friday as of the close of regular trading on the New York Stock Exchange generally 400 pm Eastern Time (the ldquoNAV Calculation Timerdquo) NAV per Share will be calculated by dividing the Fundrsquos net assets by the number of Fund Shares outstanding For more information regarding the valuation of Fund investments in calculating the Fundrsquos NAV see the Registration Statement
SR-NASDAQ-2015-011 Amendment No 2 Page 45 of 64
such instruments (the ldquoCreation Basketrdquo) In addition if there is a difference between the
NAV attributable to a Creation Unit and the market value of the Creation Basket
exchanged for the Creation Unit the party conveying instruments with the lower value
will pay to the other an amount in cash equal to the difference (referred to as the ldquoCash
Componentrdquo)
Creations and redemptions must be made by or through an Authorized Participant
that has executed an agreement that has been agreed to by the Distributor and BNY with
respect to creations and redemptions of Creation Units All standard orders to create
Creation Units must be received by the transfer agent no later than the closing time of the
regular trading session on the New York Stock Exchange (ordinarily 400 pm Eastern
Time) (the ldquoClosing Timerdquo) in each case on the date such order is placed in order for the
creation of Creation Units to be effected based on the NAV of Shares as next determined
on such date after receipt of the order in proper form Shares may be redeemed only in
Creation Units at their NAV next determined after receipt not later than the Closing Time
of a redemption request in proper form by the Fund through the transfer agent and only
on a business day
The Fundrsquos custodian through the National Securities Clearing Corporation will
make available on each business day prior to the opening of business of the Exchange
the list of the names and quantities of the instruments comprising the Creation Basket as
well as the estimated Cash Component (if any) for that day The published Creation
Basket will apply until a new Creation Basket is announced on the following business
day prior to commencement of trading in the Shares
SR-NASDAQ-2015-011 Amendment No 2 Page 46 of 64
Net Asset Value
The Fundrsquos NAV will be determined as of the close of trading (normally
400 pm Eastern Time) on each day the New York Stock Exchange is open for
business NAV will be calculated for the Fund by taking the market price of the Fundrsquos
total assets including interest or dividends accrued but not yet collected less all
liabilities and dividing such amount by the total number of Shares outstanding The
result rounded to the nearest cent will be the NAV per Share All valuations will be
subject to review by the Board of Trustees of the Trust (ldquoTrust Boardrdquo) or its delegate
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with valuation procedures (which may be revised from time to time) adopted by the Trust
Board (the ldquoValuation Proceduresrdquo) and in accordance with the 1940 Act A market
valuation generally means a valuation (i) obtained from an exchange an independent
pricing service (ldquoPricing Servicerdquo) or a major market maker (or dealer) or (ii) based on a
price quotation or other equivalent indication of value supplied by an exchange a Pricing
Service or a major market maker (or dealer) The information summarized below is
based on the Valuation Procedures as currently in effect however as noted above the
Valuation Procedures are amended from time to time and therefore such information is
subject to change
Certain securities including Floating Rate Debt Instruments in which the Fund
may invest will not be listed on any securities exchange or board of trade Such
securities will typically be bought and sold by institutional investors in individually
negotiated private transactions that function in many respects like an over-the-counter
SR-NASDAQ-2015-011 Amendment No 2 Page 47 of 64
secondary market although typically no formal market makers will exist Certain
securities particularly debt securities will have few or no trades or trade infrequently
and information regarding a specific security may not be widely available or may be
incomplete Accordingly determinations of the fair value of debt securities may be
based on infrequent and dated information Because there is less reliable objective data
available elements of judgment may play a greater role in valuation of debt securities
than for other types of securities Typically Floating Rate Debt Instruments and other
debt securities in which the Fund may invest (other than those described below) will be
valued using information provided by a Pricing Service Debt securities having a
remaining maturity of 60 days or less when purchased will be valued at cost adjusted for
amortization of premiums and accretion of discounts provided the Adviserrsquos pricing
committee (the ldquoPricing Committeerdquo) has determined that the use of amortized cost is an
appropriate reflection of fair value given market and issuer-specific conditions existing at
the time of the determination Overnight repurchase agreements will be valued at cost
and term repurchase agreements (ie those whose maturity exceeds seven days) will be
valued at the average of the bid quotations obtained daily from at least two recognized
dealers
Asset-backed and mortgage-backed securities will generally be valued by using a
Pricing Service If a Pricing Service does not cover a particular asset-backed or
mortgage-backed security or discontinues covering a particular asset-backed or
mortgage-backed security the security will be priced using broker quotes generally
provided by brokers that make or participate in markets in the security To derive values
Pricing Services and broker-dealers may use matrix pricing and valuation models as well
SR-NASDAQ-2015-011 Amendment No 2 Page 48 of 64
as recent market transactions for the same or similar assets As it deems appropriate the
Pricing Committee may determine that a Pricing Service price does not represent an
accurate value of an asset-backed or mortgage-backed security based on broker quotes it
receives a recent trade in the security by the Fund information from a portfolio manager
or other market information In the event that the Pricing Committee determines that the
Pricing Service price is unreliable or inaccurate based on such other information broker
quotes may be used Additionally if the Pricing Committee determines that the price of
an asset-backed or mortgage-backed security obtained from a Pricing Service and
available broker quotes is unreliable or inaccurate due to market conditions or other
reasons or if a Pricing Service price or broker quote is unavailable the security will be
valued using fair value pricing as described below
Equity securities listed on any exchange other than the Exchange will be valued at
the last sale price on the exchange on which they are principally traded on the business
day as of which such value is being determined Equity securities listed on the Exchange
will be valued at the official closing price on the business day as of which such value is
being determined If there has been no sale on such day or no official closing price in
the case of securities traded on the Exchange the securities will be valued using fair
value pricing as described below Equity securities traded on more than one securities
exchange will be valued at the last sale price or official closing price as applicable on
the business day as of which such value is being determined at the close of the exchange
representing the principal market for such securities
Exchange-traded options and futures contracts will be valued at the closing price
in the market where such contracts are principally traded
SR-NASDAQ-2015-011 Amendment No 2 Page 49 of 64
Certain securities including Floating Rate Debt Instruments in which the Fund
will invest will not be able to be priced by pre-established pricing methods Such
securities may be valued by the Trust Board or its delegate at fair value The use of fair
value pricing by the Fund will be governed by the Valuation Procedures and conducted in
accordance with the provisions of the 1940 Act Valuing the Fundrsquos securities using fair
value pricing will result in using prices for those securities that may differ from current
market valuations or official closing prices on the applicable exchange
Availability of Information
The Fundrsquos website (wwwftportfolioscom) which will be publicly available
prior to the public offering of Shares will include a form of the prospectus for the Fund
that may be downloaded The website will include the Sharesrsquo ticker CUSIP and
exchange information along with additional quantitative information updated on a daily
basis including for the Fund (1) daily trading volume the prior business dayrsquos reported
NAV and closing price mid-point of the bidask spread at the time of calculation of such
NAV (the ldquoBidAsk Pricerdquo)33 and a calculation of the premium and discount of the
BidAsk Price against the NAV and (2) data in chart format displaying the frequency
distribution of discounts and premiums of the daily BidAsk Price against the NAV
within appropriate ranges for each of the four previous calendar quarters On each
business day before commencement of trading in Shares in the Regular Market Session34
33 The BidAsk Price of the Fund will be determined using the mid-point of the highest bid and the lowest offer on the Exchange as of the time of calculation of the Fundrsquos NAV The records relating to BidAsk Prices will be retained by the Fund and its service providers
34 See Nasdaq Rule 4120(b)(4) (describing the three trading sessions on the Exchange (1) Pre-Market Session from 4 am to 930 am Eastern Time (2)
SR-NASDAQ-2015-011 Amendment No 2 Page 50 of 64
on the Exchange the Fund will disclose on its website the identities and quantities of the
portfolio of securities and other assets (the ldquoDisclosed Portfoliordquo as defined in Nasdaq
Rule 5735(c)(2)) held by the Fund that will form the basis for the Fundrsquos calculation of
NAV at the end of the business day 35 The Fundrsquos disclosure of derivative positions in
the Disclosed Portfolio will include information that market participants can use to value
these positions intraday On a daily basis the Fund will disclose on the Fundrsquos website
the following information regarding each portfolio holding as applicable to the type of
holding ticker symbol CUSIP number or other identifier if any a description of the
holding (including the type of holding) the identity of the security or other asset or
instrument underlying the holding if any for options the option strike price quantity
held (as measured by for example par value notional value or number of shares
contracts or units) maturity date if any coupon rate if any effective date if any market
value of the holding and percentage weighting of the holding in the Fundrsquos portfolio
The website information will be publicly available at no charge
In addition for the Fund an estimated value defined in Rule 5735(c)(3) as the
ldquoIntraday Indicative Valuerdquo that reflects an estimated intraday value of the Fundrsquos
Disclosed Portfolio will be disseminated Moreover the Intraday Indicative Value
Regular Market Session from 930 am to 4 pm or 415 pm Eastern Time and (3) Post-Market Session from 4 pm or 415 pm to 8 pm Eastern Time)
Under accounting procedures to be followed by the Fund trades made on the prior business day (ldquoTrdquo) will be booked and reflected in NAV on the current business day (ldquoT+1rdquo) Accordingly the Fund will be able to disclose at the beginning of the business day the portfolio that will form the basis for the NAV calculation at the end of the business day
35
SR-NASDAQ-2015-011 Amendment No 2 Page 51 of 64
available on the NASDAQ OMX Information LLC proprietary index data service36 will
be based upon the current value for the components of the Disclosed Portfolio and will be
updated and widely disseminated by one or more major market data vendors and broadly
displayed at least every 15 seconds during the Regular Market Session The Intraday
Indicative Value will be based on quotes and closing prices from the securitiesrsquo local
market and may not reflect events that occur subsequent to the local marketrsquos close
Premiums and discounts between the Intraday Indicative Value and the market price may
occur This should not be viewed as a ldquoreal timerdquo update of the NAV per Share of the
Fund which is calculated only once a day
The dissemination of the Intraday Indicative Value together with the Disclosed
Portfolio will allow investors to determine the value of the underlying portfolio of the
Fund on a daily basis and will provide a close estimate of that value throughout the
trading day
Investors will also be able to obtain the Fundrsquos Statement of Additional
Information (ldquoSAIrdquo) the Fundrsquos annual and semi-annual reports (together ldquoShareholder
Reportsrdquo) and its Form N-CSR and Form N-SAR filed twice a year The Fundrsquos SAI
and Shareholder Reports will be available free upon request from the Fund and those
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or
downloaded from the Commissionrsquos website at wwwsecgov Information regarding
Currently the NASDAQ OMX Global Index Data Service (ldquoGIDSrdquo) is the NASDAQ OMX global index data feed service offering real-time updates daily summary messages and access to widely followed indexes and Intraday Indicative Values for ETFs GIDS provides investment professionals with the daily information needed to track or trade NASDAQ OMX indexes listed ETFs or third-party partner indexes and ETFs
36
SR-NASDAQ-2015-011 Amendment No 2 Page 52 of 64
market price and trading volume of the Shares will be continually available on a real-time
basis throughout the day on brokersrsquo computer screens and other electronic services
Information regarding the previous dayrsquos closing price and trading volume information
for the Shares will be published daily in the financial section of newspapers Quotation
and last sale information for the Shares will be available via Nasdaq proprietary quote
and trade services as well as in accordance with the Unlisted Trading Privileges and the
Consolidated Tape Association (ldquoCTArdquo) plans for the Shares Quotation and last sale
information for the other ETFs in which the Fund will invest will be available via the
quote and trade services of their respective primary exchanges as well as in accordance
with the Unlisted Trading Privileges and the CTA plans as applicable Quotation and
last sale information for US exchange-traded options will be available via the Options
Price Reporting Authority Intraday executable price quotations on Floating Rate Debt
Instruments and other assets not traded on an exchange will be available from major
broker-dealer firms or market data vendors as well as from automated quotation systems
published or other public sources or online information services Additionally the Trade
Reporting and Compliance Engine (ldquoTRACErdquo) of the Financial Industry Regulatory
Authority (ldquoFINRArdquo) will be a source of price information for corporate bonds
privately-issued securities mortgage-backed securities and asset-backed securities to the
extent transactions in such securities are reported to TRACE37 For exchange-traded
Broker-dealers that are FINRA member firms have an obligation to report transactions in specified debt securities to TRACE to the extent required under applicable FINRA rules Generally such debt securities will have at issuance a maturity that exceeds one calendar year
37
SR-NASDAQ-2015-011 Amendment No 2 Page 53 of 64
assets intraday pricing information will be available directly from the applicable listing
exchange
Additional information regarding the Fund and the Shares including investment
strategies risks creation and redemption procedures fees Fund holdings disclosure
policies distributions and taxes will be included in the Registration Statement
Initial and Continued Listing
The Shares will be subject to Rule 5735 which sets forth the initial and continued
listing criteria applicable to Managed Fund Shares The Exchange represents that for
initial andor continued listing the Fund must be in compliance with Rule 10A-338 under
the Act A minimum of 100000 Shares will be outstanding at the commencement of
trading on the Exchange The Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the NAV and the
Disclosed Portfolio will be made available to all market participants at the same time
Trading Halts
With respect to trading halts the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading in the Shares of the Fund Nasdaq will
halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12) Trading may be
halted because of market conditions or for reasons that in the view of the Exchange
make trading in the Shares inadvisable These may include (1) the extent to which
trading is not occurring in the securities andor the other assets constituting the Disclosed
Portfolio of the Fund or (2) whether other unusual conditions or circumstances
See 17 CFR 24010A-3 38
SR-NASDAQ-2015-011 Amendment No 2 Page 54 of 64
detrimental to the maintenance of a fair and orderly market are present Trading in the
Shares also will be subject to Rule 5735(d)(2)(D) which sets forth circumstances under
which Shares of the Fund may be halted
Trading Rules
Nasdaq deems the Shares to be equity securities thus rendering trading in the
Shares subject to Nasdaqrsquos existing rules governing the trading of equity securities
Nasdaq will allow trading in the Shares from 400 am until 800 pm Eastern Time
The Exchange has appropriate rules to facilitate transactions in the Shares during all
trading sessions As provided in Nasdaq Rule 5735(b)(3) the minimum price variation
for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $001
Surveillance
The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws39 The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities laws
The surveillances referred to above generally focus on detecting securities trading
outside their normal patterns which could be indicative of manipulative or other violative
activity When such situations are detected surveillance analysis follows and
FINRA surveils trading on the Exchange pursuant to a regulatory services agreement The Exchange is responsible for FINRArsquos performance under this regulatory services agreement
39
SR-NASDAQ-2015-011 Amendment No 2 Page 55 of 64
investigations are opened where appropriate to review the behavior of all relevant
parties for all relevant trading violations
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 56 of 64
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
SR-NASDAQ-2015-011 Amendment No 2 Page 57 of 64
2 Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
SR-NASDAQ-2015-011 Amendment No 2 Page 58 of 64
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
SR-NASDAQ-2015-011 Amendment No 2 Page 59 of 64
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
SR-NASDAQ-2015-011 Amendment No 2 Page 60 of 64
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 61 of 64
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
SR-NASDAQ-2015-011 Amendment No 2 Page 62 of 64
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
B Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
C Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received From Members Participants or Others
Written comments were neither solicited nor received
III Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Within 45 days of the date of publication of this notice in the Federal Register or
within such longer period (i) as the Commission may designate up to 90 days of such date
if it finds such longer period to be appropriate and publishes its reasons for so finding or
(ii) as to which the Exchange consents the Commission shall (a) by order approve or
disapprove such proposed rule change or (b) institute proceedings to determine whether
the proposed rule change should be disapproved
SR-NASDAQ-2015-011 Amendment No 2 Page 63 of 64
IV Solicitation of Comments
Interested persons are invited to submit written data views and arguments
concerning the foregoing including whether the proposed rule change is consistent with
the Act Comments may be submitted by any of the following methods
Electronic comments
bull Use the Commissionrsquos Internet comment form
(httpwwwsecgovrulessroshtml) or
bull Send an e-mail to rule-commentssecgov Please include File Number
SR-NASDAQ-2015-011 on the subject line
Paper comments
bull Send paper comments in triplicate to Brent J Fields Secretary Securities and
Exchange Commission Station Place 100 F Street NE Washington DC
20549-9303
All submissions should refer to File Number SR-NASDAQ-2015-011 This file number
should be included on the subject line if e-mail is used To help the Commission process
and review your comments more efficiently please use only one method The
Commission will post all comments on the Commissionrsquos Internet website
httpwwwsecgovrulessroshtml
Copies of the submission all subsequent amendments all written statements with
respect to the proposed rule change that are filed with the Commission and all written
communications relating to the proposed rule change between the Commission and any
person other than those that may be withheld from the public in accordance with the
provisions of 5 USC 552 will be available for website viewing and printing in the
Commissionrsquos Public Reference Room 100 F Street NE Washington DC 20549 on
SR-NASDAQ-2015-011 Amendment No 2 Page 64 of 64
official business days between the hours of 1000 am and 300 pm Copies of the filing
also will be available for inspection and copying at the principal office of Nasdaq All
comments received will be posted without change the Commission does not edit
personal identifying information from submissions You should submit only information
that you wish to make available publicly
All submissions should refer to File Number SR-NASDAQ-2015-011 and should
be submitted on or before [insert date 21 days from publication in the Federal Register]
For the Commission by the Division of Trading and Markets pursuant to
delegated authority41
Kevin M OrsquoNeill Deputy Secretary
17 CFR 20030-3(a)(12) 41
Required fields are shown with yellow backgrounds and asterisks
SECURITIES AND EXCHANGE COMMISSION WASHINGTON DC 20549
For complete Form 19b-4 instructions please refer to the EFFS website
Form 19b-4 Information
Add Remove View
The self-regulatory organization must provide all required information presented in a clear and comprehensible manner to enable the public to provide meaningful comment on the proposal and for the Commission to determine whether the proposal is consistent with the Act and applicable rules and regulations under the Act
Exhibit 1 - Notice of Proposed Rule Change
Add Remove View
The Notice section of this Form 19b-4 must comply with the guidelines for publication in the Federal Register as well as any requirements for electronic filing as published by the Commission (if applicable) The Office of the Federal Register (OFR) offers guidance on Federal Register publication requirements in the Federal Register Document Drafting Handbook October 1998 Revision For example all references to the federal securities laws must include the corresponding cite to the United States Code in a footnote All references to SEC rules must include the corresponding cite to the Code of Federal Regulations in a footnote All references to Securities Exchange Act Releases must include the release number release date Federal Register cite Federal Register date and corresponding file number (eg SR-[SRO] -xx-xx) A material failure to comply with these guidelines will result in the proposed rule change being deemed not properly filed See also Rule 0-3 under the Act (17 CFR 2400-3)
Exhibit 1A- Notice of Proposed Rule Change Security-Based Swap Submission or Advance Notice by Clearing Agencies
Add Remove View
The Notice section of this Form 19b-4 must comply with the guidelines for publication in the Federal Register as well as any requirements for electronic filing as published by the Commission (if applicable) The Office of the Federal Register (OFR) offers guidance on Federal Register publication requirements in the Federal Register Document Drafting Handbook October 1998 Revision For example all references to the federal securities laws must include the corresponding cite to the United States Code in a footnote All references to SEC rules must include the corresponding cite to the Code of Federal Regulations in a footnote All references to Securities Exchange Act Releases must include the release number release date Federal Register cite Federal Register date and corresponding file number (eg SR-[SRO] -xx-xx) A material failure to comply with these guidelines will result in the proposed rule change security-based swap submission or advance notice being deemed not properly filed See also Rule 0-3 under the Act (17 CFR 2400-3)
Exhibit Sent As Paper Document
View
Exhibit 2 - Notices Written Comments Transcripts Other Communications
Add Remove
Copies of notices written comments transcripts other communications If such documents cannot be filed electronically in accordance with Instruction F they shall be filed in accordance with Instruction G
Copies of any form report or questionnaire that the self-regulatory organization proposes to use to help implement or operate the proposed rule change or that is referred to by the proposed rule change
Exhibit 3 - Form Report or Questionnaire
Add Remove View
Exhibit Sent As Paper Document
Exhibit 4 - Marked Copies
Add Remove View
The full text shall be marked in any convenient manner to indicate additions to and deletions from the immediately preceding filing The purpose of Exhibit 4 is to permit the staff to identify immediately the changes made from the text of the rule with which it has been working
The self-regulatory organization may choose to attach as Exhibit 5 proposed changes to rule text in place of providing it in Item I and which may otherwise be more easily readable if provided separately from Form 19b-4 Exhibit 5 shall be considered part of the proposed rule change
Exhibit 5 - Proposed Rule Text
Add Remove View
If the self-regulatory organization is amending only part of the text of a lengthy proposed rule change it may with the Commissions permission file only those portions of the text of the proposed rule change in which changes are being made if the filing (ie partial amendment) is clearly understandable on its face Such partial amendment shall be clearly identified and marked to show deletions and additions
Partial Amendment
Add Remove View
SR-NASDAQ-2015-011 Amendment No 2 Page 3 of 64
1 Text of Proposed Rule Change
(a) Pursuant to the provisions of Section 19(b)(1) of the Securities Exchange Act
of 1934 (ldquoActrdquo)1 and Rule 19b-4 thereunder2 The NASDAQ Stock Market LLC
(ldquoNasdaqrdquo or the ldquoExchangerdquo) is filing with the Securities and Exchange Commission
(ldquoCommissionrdquo) a proposed rule change to list and trade the shares of the First Trust
Strategic Floating Rate ETF (the ldquoFundrdquo) of First Trust Exchange-Traded Fund IV (the
ldquoTrustrdquo) under Nasdaq Rule 5735 (ldquoManaged Fund Sharesrdquo) 3 The shares of the Fund
are collectively referred to herein as the ldquoSharesrdquo
(b) and (c) Not applicable
2 Procedures of the Self-Regulatory Organization
The proposed rule change was approved by senior management of the Exchange
pursuant to authority delegated by the Board of Directors of the Exchange (the ldquoBoardrdquo)
on July 17 2013 Exchange staff will advise the Board of any action taken pursuant to
delegated authority No other action by the Exchange is necessary for the filing of the
rule change
1 15 USC 78s(b)(1)
2 17 CFR 24019b-4
3 The Commission approved Nasdaq Rule 5735 in Securities Exchange Act Release No 57962 (June 13 2008) 73 FR 35175 (June 20 2008) (SR-NASDAQ-2008shy039) There are already multiple actively-managed funds listed on the Exchange see eg Securities Exchange Act Release Nos 69464 (April 26 2013) 78 FR 25774 (May 2 2013) (SR-NASDAQ-2013-036) (order approving listing and trading of First Trust Senior Loan Fund) 68972 (February 22 2013) 78 FR 13721 (February 28 2013) (SR-NASDAQ-2012-147) (order approving listing and trading of First Trust High Yield LongShort ETF) 66489 (February 29 2012) 77 FR 13379 (March 6 2012) (SR-NASDAQ-2012-004) (order approving listing and trading of WisdomTree Emerging Markets Corporate Bond Fund) The Exchange believes the proposed rule change raises no significant issues not previously addressed in those prior Commission orders
SR-NASDAQ-2015-011 Amendment No 2 Page 4 of 64
Questions regarding this rule filing may be directed to Jonathan F Cayne Senior
Associate General Counsel The NASDAQ OMX Group at (301) 978-8493 (telephone)
3 Self-Regulatory Organizationrsquos Statement of the Purpose of and Statutory Basis for the Proposed Rule Change
a Purpose
The Exchange proposes to list and trade the Shares of the Fund under Nasdaq
Rule 5735 which governs the listing and trading of Managed Fund Shares4 on the
Exchange The Fund will be an actively-managed exchange-traded fund (ldquoETFrdquo) The
Shares will be offered by the Trust which was established as a Massachusetts business
trust on September 15 20105 The Trust is registered with the Commission as an
investment company and has filed a registration statement on Form N-1A (ldquoRegistration
Statementrdquo) with the Commission 6 The Fund will be a series of the Trust The Fund
4 A Managed Fund Share is a security that represents an interest in an investment company registered under the Investment Company Act of 1940 (15 USC 80ashy1) (the ldquo1940 Actrdquo) organized as an open-end investment company or similar entity that invests in a portfolio of securities selected by its investment adviser consistent with its investment objectives and policies In contrast an open-end investment company that issues Index Fund Shares listed and traded on the Exchange under Nasdaq Rule 5705 seeks to provide investment results that correspond generally to the price and yield performance of a specific foreign or domestic stock index fixed income securities index or combination thereof
5 The Commission has issued an order upon which the Trust may rely granting certain exemptive relief under the 1940 Act See Investment Company Act Release No 30029 (April 10 2012) (File No 812-13795) (the ldquoExemptive Reliefrdquo) In addition the Commission has issued no-action relief upon which the Trust may rely pertaining to the Fundrsquos ability to invest in derivatives notwithstanding certain representations in the application for the Exemptive Relief See Commission No-Action Letter (December 6 2012)
6 See Post-Effective Amendment No 104 to Registration Statement on Form N-1A for the Trust dated January 29 2015 (File Nos 333-174332 and 811-22559) The descriptions of the Fund and the Shares contained herein are based in part on information in the Registration Statement
7
SR-NASDAQ-2015-011 Amendment No 2 Page 5 of 64
intends to qualify each year as a regulated investment company (ldquoRICrdquo) under
Subchapter M of the Internal Revenue Code of 1986 as amended
First Trust Advisors LP will be the investment adviser (ldquoAdviserrdquo) to the Fund
First Trust Portfolios LP (the ldquoDistributorrdquo) will be the principal underwriter and
distributor of the Fundrsquos Shares The Bank of New York Mellon Corporation (ldquoBNYrdquo)
will act as the administrator accounting agent custodian and transfer agent to the Fund
Paragraph (g) of Rule 5735 provides that if the investment adviser to the
investment company issuing Managed Fund Shares is affiliated with a broker-dealer
such investment adviser shall erect a ldquofire wallrdquo between the investment adviser and the
broker-dealer with respect to access to information concerning the composition andor
changes to such investment company portfolio7 In addition paragraph (g) further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio Rule 5735(g) is similar
An investment adviser to an open-end fund is required to be registered under the Investment Advisers Act of 1940 (the ldquoAdvisers Actrdquo) As a result the Adviser and its related personnel are subject to the provisions of Rule 204A-1 under the Advisers Act relating to codes of ethics This Rule requires investment advisers to adopt a code of ethics that reflects the fiduciary nature of the relationship to clients as well as compliance with other applicable securities laws Accordingly procedures designed to prevent the communication and misuse of non-public information by an investment adviser must be consistent with Rule 204A-1 under the Advisers Act In addition Rule 206(4)-7 under the Advisers Act makes it unlawful for an investment adviser to provide investment advice to clients unless such investment adviser has (i) adopted and implemented written policies and procedures reasonably designed to prevent violation by the investment adviser and its supervised persons of the Advisers Act and the Commission rules adopted thereunder (ii) implemented at a minimum an annual review regarding the adequacy of the policies and procedures established pursuant to subparagraph (i) above and the effectiveness of their implementation and (iii) designated an individual (who is a supervised person) responsible for administering the policies and procedures adopted under subparagraph (i) above
SR-NASDAQ-2015-011 Amendment No 2 Page 6 of 64
to Nasdaq Rule 5705(b)(5)(A)(i) however paragraph (g) in connection with the
establishment of a ldquofire wallrdquo between the investment adviser and the broker-dealer
reflects the applicable open-end fundrsquos portfolio not an underlying benchmark index as
is the case with index-based funds The Adviser is not a broker-dealer although it is
affiliated with the Distributor a broker-dealer The Adviser has implemented a fire wall
with respect to its broker-dealer affiliate regarding access to information concerning the
composition andor changes to the portfolio In addition personnel who make decisions
on the Fundrsquos portfolio composition will be subject to procedures designed to prevent the
use and dissemination of material non-public information regarding the Fundrsquos portfolio
In the event (a) the Adviser becomes or becomes newly affiliated with a broker-dealer
or (b) any new adviser or sub-adviser is a registered broker-dealer or becomes affiliated
with another broker-dealer it will implement a fire wall with respect to its relevant
personnel andor such broker-dealer affiliate as applicable regarding access to
information concerning the composition andor changes to the portfolio and will be
subject to procedures designed to prevent the use and dissemination of material
non-public information regarding such portfolio The Fund does not currently intend to
use a sub-adviser
First Trust Strategic Floating Rate ETF
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions8 at least 80 of its
The term ldquounder normal market conditionsrdquo as used herein includes but is not limited to the absence of adverse market economic political or other conditions including extreme volatility or trading halts in the fixed income markets or the financial markets generally operational issues causing dissemination of inaccurate market information or force majeure type events such as systems
8
SR-NASDAQ-2015-011 Amendment No 2 Page 7 of 64
net assets in a portfolio of the following types of floating-rate9 debt instruments issued by
US and non-US public- and private-sector entities floating-rate corporate10 and
government bonds and notes floating-rate agency securities 11 floating-rate instruments
of non-US issuers floating-rate privately-issued securities 12 floating-rate asset-backed
failure natural or man-made disaster act of God armed conflict act of terrorism riot or labor disruption or any similar intervening circumstance For temporary defensive purposes during the initial invest-up period and during periods of high cash inflows or outflows the Fund may depart from its principal investment strategies for example it may hold a higher than normal proportion of its assets in cash During such periods the Fund may not be able to achieve its investment objective The Fund may adopt a defensive strategy when the Adviser believes securities in which the Fund normally invests have elevated risks due to political or economic factors and in other extraordinary circumstances
9 For the avoidance of doubt the term ldquofloating-raterdquo shall also include similar terms such as ldquovariable-raterdquo and ldquoadjustable-raterdquo
10 The Adviser expects that under normal market conditions generally for a corporate bond to be considered as an eligible investment after taking into account such an investment at least 75 of the Fundrsquos net assets that are invested in floating-rate corporate bonds and as described below fixed-rate corporate bonds (in the aggregate) will be comprised of corporate bonds that have at the time of original issuance $100 million or more par amount outstanding
11 ldquoAgency securitiesrdquo for these purposes generally includes securities issued by the following entities Government National Mortgage Association (Ginnie Mae) Federal National Mortgage Association (Fannie Mae) Federal Home Loan Banks (FHLBanks) Federal Home Loan Mortgage Corporation (Freddie Mac) Farm Credit System (FCS) Farm Credit Banks (FCBanks) Student Loan Marketing Association (Sallie Mae) Resolution Funding Corporation (REFCORP) Financing Corporation (FICO) and the Farm Credit System (FCS) Financial Assistance Corporation (FAC) Agency securities can include but are not limited to mortgage-backed securities
12 ldquoPrivately-issued securitiesrdquo for these purposes generally includes Rule 144A securities other than mortgage-backed Rule 144A securities Under normal market conditions privately-issued securities will have at the time of original issuance $100 million or more principal amount outstanding to be considered eligible investments
SR-NASDAQ-2015-011 Amendment No 2 Page 8 of 64
securities 13 floating-rate mortgage-backed securities14 floating-rate loans 15 and
investment companies16 (including investment companies advised by the Adviser) that
13 Asset-backed securities are securities that are backed by a pool of assets The Fund currently intends to invest in asset-backed securities that are consumer asset-backed securities
14 Mortgage-backed securities which are securities that directly or indirectly represent a participation in or are secured by and payable from mortgage loans on real property will consist of (1) residential mortgage-backed securities (ldquoRMBSrdquo) (2) commercial mortgage-backed securities (ldquoCMBSrdquo) (3) stripped mortgage-backed securities (ldquoSMBSrdquo) which are mortgage-backed securities where mortgage payments are divided between paying the loanrsquos principal and paying the loanrsquos interest (4) collateralized mortgage obligations (ldquoCMOsrdquo) and real estate mortgage investment conduits (ldquoREMICsrdquo) which are mortgage-backed securities that are divided into multiple classes with each class being entitled to a different share of the principal and interest payments received from the pool of underlying assets
15 The floating-rate loans in which the Fund will invest will represent amounts borrowed by companies or other entities from banks and other lenders and a significant portion of such floating-rate loans may be rated below investment grade or unrated Floating-rate loans held by the Fund may be senior or subordinate obligations of the borrower and may or may not be secured by collateral First lien senior secured floating-rate loans are referred to herein as ldquosenior loansrdquo Floating-rate loans that are not senior loans (ie unsecured floating-rate loans and secured floating-rate loans that are not first lien floating-rate loans) are referred to herein as ldquojunior loansrdquo The Fund will generally invest in floating-rate loans that the Adviser deems to be liquid with readily available prices notwithstanding the foregoing the Fund may invest in floating-rate loans that are deemed illiquid so long as the Fund complies with the 15 limitation on investments of its net assets in illiquid assets described below under ldquoInvestment Restrictionsrdquo
16 The Fund currently anticipates investing only in registered open-end investment companies that are listed and traded in the US on registered exchanges (ie other ETFs) An ETF is an investment company registered under the 1940 Act that holds a portfolio of securities Many ETFs are designed to track the performance of a securities index including industry sector country and region indexes The Fund may invest in the securities of ETFs in excess of the limits imposed under the 1940 Act pursuant to exemptive orders obtained by other ETFs and their sponsors from the Commission In addition the Fund may invest in the securities of certain investment companies in excess of the limits imposed under the 1940 Act pursuant to an exemptive order obtained by the Trust and the Adviser from the Commission See Investment Company Act Release No 30377
SR-NASDAQ-2015-011 Amendment No 2 Page 9 of 64
invest primarily in the foregoing types of debt instruments17 (collectively ldquoFloating Rate
Debt Instrumentsrdquo)
At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade To be considered
ldquoinvestment graderdquo under normal market conditions rated Floating Rate Debt
Instruments will carry at the time of purchase a rating in the highest four rating
categories of at least one nationally recognized statistical ratings organization
(ldquoNRSROrdquo) (eg BBB- or higher by Standard amp Poorrsquos Ratings Services (ldquoSampPrdquo)
andor Fitch Ratings (ldquoFitchrdquo) or Baa3 or higher by Moodyrsquos Investors Service Inc
(ldquoMoodyrsquosrdquo)18 For unrated securities to be considered ldquoinvestment graderdquo under normal
market conditions such securities will be determined at the time of purchase to be of
comparable quality19 by the Adviser The Fund may invest up to 35 of its net assets in
(February 5 2013) (File No 812-13895) The ETFs in which the Fund may invest include Index Fund Shares (as described in Nasdaq Rule 5705) Portfolio Depository Receipts (as described in Nasdaq Rule 5705) and Managed Fund Shares (as described in Nasdaq Rule 5735) While the Fund may invest in inverse ETFs the Fund will not invest in leveraged or inverse leveraged (eg 2X or -3X) ETFs
17 The liquidity of a security especially in the case of asset-backed and mortgage-backed securities will be a substantial factor in the Fundrsquos security selection process Consistent with the discussion below under ldquoInvestment Restrictionsrdquo the Fund will not purchase any Floating Rate Debt Instruments (including asset-backed securities and mortgage-backed securities) that in the Adviserrsquos opinion are illiquid if as a result more than 15 of the value of the Fundrsquos net assets will be invested in illiquid assets
18 For the avoidance of doubt if a security is rated by multiple NRSROs and receives different ratings the Fund will treat the security as being rated in the highest rating category received from an NRSRO
19 Comparable quality of unrated securities will be determined by the Adviser based on fundamental credit analysis of the unrated security and comparable NRSRO-rated securities On a best efforts basis the Adviser will attempt to make a rating
SR-NASDAQ-2015-011 Amendment No 2 Page 10 of 64
securities that are at the time of investment rated below investment grade by each
NRSRO rating such securities (or securities that are unrated and determined by the
Adviser to be of comparable quality) commonly referred to as ldquohigh yieldrdquo or ldquojunkrdquo
bonds If subsequent to purchase by the Fund a security held by the Fund experiences a
decline in credit quality and falls below investment grade the Fund may continue to hold
the security and it will not cause the Fund to violate the 35 investment limitation
however the security will be taken into account for purposes of determining whether
purchases of additional securities will cause the Fund to violate such limitation
The Fund will limit its investments in asset-backed securities (excluding agency
mortgage-backed securities) and non-agency mortgage-backed securities (in the
aggregate) to 20 of its net assets20 In addition the Fund will limit its investments in
junior loans to 20 of its net assets
The Fund will hold debt securities (including in the aggregate Floating Rate
Debt Instruments and the fixed-rate debt securities described below) of at least 13
non-affiliated issuers
Other Investments
Under normal market conditions the Fund will invest primarily in the Floating
Rate Debt Instruments described above to meet its investment objective In addition the
determination based on publicly available data In making a ldquocomparable qualityrdquo determination the Adviser may consider for example whether the issuer of the security has issued other rated securities the nature and provisions of the relevant security whether the obligations under the relevant security are guaranteed by another entity and the rating of such guarantor (if any) relevant cash flows macroeconomic analysis andor sector or industry analysis
For the avoidance of doubt there is no limitation on the Fundrsquos investments in agency mortgage-backed securities
20
SR-NASDAQ-2015-011 Amendment No 2 Page 11 of 64
Fund may invest up to 20 of its net assets in the following types of fixed-rate debt
securities corporate21 and government bonds and notes agency securities22 instruments
of non-US issuers in developed markets privately-issued securities 23 asset-backed
securities 24 mortgage-backed securities 25 municipal bonds money market securities26
and investment companies27 (including investment companies advised by the Adviser)
that invest primarily in the foregoing types of debt securities
Further to pursue its investment objective the Fund may invest up to 20 of the
value of its net assets in exchange-listed options on US Treasury futures contracts and
exchange-listed US Treasury futures contracts28 The use of these derivative
transactions may allow the Fund to obtain net long or short exposures to selected interest
rates These derivatives may also be used to hedge risks including interest rate risks and
21 See footnote 10 above
22 See footnote 11 above
23 See footnote 12 above
24 See footnote 13 above
25 See footnote 14 above
26 ldquoMoney market securitiesrdquo for these purposes generally includes short-term high-quality obligations issued or guaranteed by the US Treasury or the agencies or instrumentalities of the US government short-term high-quality securities issued or guaranteed by non-US governments agencies and instrumentalities repurchase agreements commercial paper (both asset-backed and non-assetshybacked) and deposits and other obligations of US and non-US banks and financial institutions
27 See footnote 16 above
28 At least 90 of the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be invested in instruments that trade in markets that are members of the Intermarket Surveillance Group (ldquoISGrdquo) (see footnote 40 below) or are parties to a comprehensive surveillance sharing agreement with the Exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 12 of 64
credit risks associated with the Fundrsquos portfolio investments The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index
Investment Restrictions
The Fund will not invest 25 or more of the value of its total assets in securities
of issuers in any one industry This restriction does not apply to (a) obligations issued or
guaranteed by the US government its agencies or instrumentalities or (b) securities of
other investment companies29
The Fund may hold up to an aggregate amount of 15 of its net assets in illiquid
assets (calculated at the time of investment) including Rule 144A securities deemed
illiquid by the Adviser30 The Fund will monitor its portfolio liquidity on an ongoing
basis to determine whether in light of current circumstances an adequate level of
liquidity is being maintained and will consider taking appropriate steps in order to
maintain adequate liquidity if through a change in values net assets or other
circumstances more than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid
assets include securities subject to contractual or other restrictions on resale and other
29 See Form N-1A Item 9 The Commission has taken the position that a fund is concentrated if it invests more than 25 of the value of its total assets in any one industry See eg Investment Company Act Release No 9011 (October 30 1975) 40 FR 54241 (November 21 1975)
30 In reaching liquidity decisions the Adviser may consider the following factors the frequency of trades and quotes for the security the number of dealers wishing to purchase or sell the security and the number of other potential purchasers dealer undertakings to make a market in the security and the nature of the security and the nature of the marketplace in which it trades (eg the time needed to dispose of the security the method of soliciting offers and the mechanics of transfer)
SR-NASDAQ-2015-011 Amendment No 2 Page 13 of 64
instruments that lack readily available markets as determined in accordance with
Commission staff guidance31
The Fund will not invest in non-US equity securities
Creation and Redemption of Shares
The Fund will issue and redeem Shares on a continuous basis at net asset value
(ldquoNAVrdquo)32 only in large blocks of Shares (ldquoCreation Unitsrdquo) in transactions with
authorized participants generally including broker-dealers and large institutional
investors (ldquoAuthorized Participantsrdquo) Creation Units generally will consist of 50000
Shares although this may change from time to time Creation Units however are not
expected to consist of less than 50000 Shares As described in the Registration
Statement and consistent with the Exemptive Relief the Fund will issue and redeem
Creation Units in exchange for an in-kind portfolio of instruments andor cash in lieu of
31 The Commission has stated that long-standing Commission guidelines have required open-end funds to hold no more than 15 of their net assets in illiquid securities and other illiquid assets See Investment Company Act Release No 28193 (March 11 2008) 73 FR 14618 (March 18 2008) footnote 34 See also Investment Company Act Release No 5847 (October 21 1969) 35 FR 19989 (December 31 1970) (Statement Regarding ldquoRestricted Securitiesrdquo) Investment Company Act Release No 18612 (March 12 1992) 57 FR 9828 (March 20 1992) (Revisions of Guidelines to Form N-1A) A fundrsquos portfolio security is illiquid if it cannot be disposed of in the ordinary course of business within seven days at approximately the value ascribed to it by the fund See Investment Company Act Release No 14983 (March 12 1986) 51 FR 9773 (March 21 1986) (adopting amendments to Rule 2a-7 under the 1940 Act) Investment Company Act Release No 17452 (April 23 1990) 55 FR 17933 (April 30 1990) (adopting Rule 144A under the Securities Act of 1933)
32 The NAV of the Fundrsquos Shares generally will be calculated once daily Monday through Friday as of the close of regular trading on the New York Stock Exchange generally 400 pm Eastern Time (the ldquoNAV Calculation Timerdquo) NAV per Share will be calculated by dividing the Fundrsquos net assets by the number of Fund Shares outstanding For more information regarding the valuation of Fund investments in calculating the Fundrsquos NAV see the Registration Statement
SR-NASDAQ-2015-011 Amendment No 2 Page 14 of 64
such instruments (the ldquoCreation Basketrdquo) In addition if there is a difference between the
NAV attributable to a Creation Unit and the market value of the Creation Basket
exchanged for the Creation Unit the party conveying instruments with the lower value
will pay to the other an amount in cash equal to the difference (referred to as the ldquoCash
Componentrdquo)
Creations and redemptions must be made by or through an Authorized Participant
that has executed an agreement that has been agreed to by the Distributor and BNY with
respect to creations and redemptions of Creation Units All standard orders to create
Creation Units must be received by the transfer agent no later than the closing time of the
regular trading session on the New York Stock Exchange (ordinarily 400 pm Eastern
Time) (the ldquoClosing Timerdquo) in each case on the date such order is placed in order for the
creation of Creation Units to be effected based on the NAV of Shares as next determined
on such date after receipt of the order in proper form Shares may be redeemed only in
Creation Units at their NAV next determined after receipt not later than the Closing Time
of a redemption request in proper form by the Fund through the transfer agent and only
on a business day
The Fundrsquos custodian through the National Securities Clearing Corporation will
make available on each business day prior to the opening of business of the Exchange
the list of the names and quantities of the instruments comprising the Creation Basket as
well as the estimated Cash Component (if any) for that day The published Creation
Basket will apply until a new Creation Basket is announced on the following business
day prior to commencement of trading in the Shares
SR-NASDAQ-2015-011 Amendment No 2 Page 15 of 64
Net Asset Value
The Fundrsquos NAV will be determined as of the close of trading (normally
400 pm Eastern Time) on each day the New York Stock Exchange is open for
business NAV will be calculated for the Fund by taking the market price of the Fundrsquos
total assets including interest or dividends accrued but not yet collected less all
liabilities and dividing such amount by the total number of Shares outstanding The
result rounded to the nearest cent will be the NAV per Share All valuations will be
subject to review by the Board of Trustees of the Trust (ldquoTrust Boardrdquo) or its delegate
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with valuation procedures (which may be revised from time to time) adopted by the Trust
Board (the ldquoValuation Proceduresrdquo) and in accordance with the 1940 Act A market
valuation generally means a valuation (i) obtained from an exchange an independent
pricing service (ldquoPricing Servicerdquo) or a major market maker (or dealer) or (ii) based on a
price quotation or other equivalent indication of value supplied by an exchange a Pricing
Service or a major market maker (or dealer) The information summarized below is
based on the Valuation Procedures as currently in effect however as noted above the
Valuation Procedures are amended from time to time and therefore such information is
subject to change
Certain securities including Floating Rate Debt Instruments in which the Fund
may invest will not be listed on any securities exchange or board of trade Such
securities will typically be bought and sold by institutional investors in individually
negotiated private transactions that function in many respects like an over-the-counter
SR-NASDAQ-2015-011 Amendment No 2 Page 16 of 64
secondary market although typically no formal market makers will exist Certain
securities particularly debt securities will have few or no trades or trade infrequently
and information regarding a specific security may not be widely available or may be
incomplete Accordingly determinations of the fair value of debt securities may be
based on infrequent and dated information Because there is less reliable objective data
available elements of judgment may play a greater role in valuation of debt securities
than for other types of securities Typically Floating Rate Debt Instruments and other
debt securities in which the Fund may invest (other than those described below) will be
valued using information provided by a Pricing Service Debt securities having a
remaining maturity of 60 days or less when purchased will be valued at cost adjusted for
amortization of premiums and accretion of discounts provided the Adviserrsquos pricing
committee (the ldquoPricing Committeerdquo) has determined that the use of amortized cost is an
appropriate reflection of fair value given market and issuer-specific conditions existing at
the time of the determination Overnight repurchase agreements will be valued at cost
and term repurchase agreements (ie those whose maturity exceeds seven days) will be
valued at the average of the bid quotations obtained daily from at least two recognized
dealers
Asset-backed and mortgage-backed securities will generally be valued by using a
Pricing Service If a Pricing Service does not cover a particular asset-backed or
mortgage-backed security or discontinues covering a particular asset-backed or
mortgage-backed security the security will be priced using broker quotes generally
provided by brokers that make or participate in markets in the security To derive values
Pricing Services and broker-dealers may use matrix pricing and valuation models as well
SR-NASDAQ-2015-011 Amendment No 2 Page 17 of 64
as recent market transactions for the same or similar assets As it deems appropriate the
Pricing Committee may determine that a Pricing Service price does not represent an
accurate value of an asset-backed or mortgage-backed security based on broker quotes it
receives a recent trade in the security by the Fund information from a portfolio manager
or other market information In the event that the Pricing Committee determines that the
Pricing Service price is unreliable or inaccurate based on such other information broker
quotes may be used Additionally if the Pricing Committee determines that the price of
an asset-backed or mortgage-backed security obtained from a Pricing Service and
available broker quotes is unreliable or inaccurate due to market conditions or other
reasons or if a Pricing Service price or broker quote is unavailable the security will be
valued using fair value pricing as described below
Equity securities listed on any exchange other than the Exchange will be valued at
the last sale price on the exchange on which they are principally traded on the business
day as of which such value is being determined Equity securities listed on the Exchange
will be valued at the official closing price on the business day as of which such value is
being determined If there has been no sale on such day or no official closing price in
the case of securities traded on the Exchange the securities will be valued using fair
value pricing as described below Equity securities traded on more than one securities
exchange will be valued at the last sale price or official closing price as applicable on
the business day as of which such value is being determined at the close of the exchange
representing the principal market for such securities
Exchange-traded options and futures contracts will be valued at the closing price
in the market where such contracts are principally traded
SR-NASDAQ-2015-011 Amendment No 2 Page 18 of 64
Certain securities including Floating Rate Debt Instruments in which the Fund
will invest will not be able to be priced by pre-established pricing methods Such
securities may be valued by the Trust Board or its delegate at fair value The use of fair
value pricing by the Fund will be governed by the Valuation Procedures and conducted in
accordance with the provisions of the 1940 Act Valuing the Fundrsquos securities using fair
value pricing will result in using prices for those securities that may differ from current
market valuations or official closing prices on the applicable exchange
Availability of Information
The Fundrsquos website (wwwftportfolioscom) which will be publicly available
prior to the public offering of Shares will include a form of the prospectus for the Fund
that may be downloaded The website will include the Sharesrsquo ticker CUSIP and
exchange information along with additional quantitative information updated on a daily
basis including for the Fund (1) daily trading volume the prior business dayrsquos reported
NAV and closing price mid-point of the bidask spread at the time of calculation of such
NAV (the ldquoBidAsk Pricerdquo)33 and a calculation of the premium and discount of the
BidAsk Price against the NAV and (2) data in chart format displaying the frequency
distribution of discounts and premiums of the daily BidAsk Price against the NAV
within appropriate ranges for each of the four previous calendar quarters On each
business day before commencement of trading in Shares in the Regular Market Session34
33 The BidAsk Price of the Fund will be determined using the mid-point of the highest bid and the lowest offer on the Exchange as of the time of calculation of the Fundrsquos NAV The records relating to BidAsk Prices will be retained by the Fund and its service providers
34 See Nasdaq Rule 4120(b)(4) (describing the three trading sessions on the Exchange (1) Pre-Market Session from 4 am to 930 am Eastern Time (2)
SR-NASDAQ-2015-011 Amendment No 2 Page 19 of 64
on the Exchange the Fund will disclose on its website the identities and quantities of the
portfolio of securities and other assets (the ldquoDisclosed Portfoliordquo as defined in Nasdaq
Rule 5735(c)(2)) held by the Fund that will form the basis for the Fundrsquos calculation of
NAV at the end of the business day 35 The Fundrsquos disclosure of derivative positions in
the Disclosed Portfolio will include information that market participants can use to value
these positions intraday On a daily basis the Fund will disclose on the Fundrsquos website
the following information regarding each portfolio holding as applicable to the type of
holding ticker symbol CUSIP number or other identifier if any a description of the
holding (including the type of holding) the identity of the security or other asset or
instrument underlying the holding if any for options the option strike price quantity
held (as measured by for example par value notional value or number of shares
contracts or units) maturity date if any coupon rate if any effective date if any market
value of the holding and percentage weighting of the holding in the Fundrsquos portfolio
The website information will be publicly available at no charge
In addition for the Fund an estimated value defined in Rule 5735(c)(3) as the
ldquoIntraday Indicative Valuerdquo that reflects an estimated intraday value of the Fundrsquos
Disclosed Portfolio will be disseminated Moreover the Intraday Indicative Value
Regular Market Session from 930 am to 4 pm or 415 pm Eastern Time and (3) Post-Market Session from 4 pm or 415 pm to 8 pm Eastern Time)
Under accounting procedures to be followed by the Fund trades made on the prior business day (ldquoTrdquo) will be booked and reflected in NAV on the current business day (ldquoT+1rdquo) Accordingly the Fund will be able to disclose at the beginning of the business day the portfolio that will form the basis for the NAV calculation at the end of the business day
35
SR-NASDAQ-2015-011 Amendment No 2 Page 20 of 64
available on the NASDAQ OMX Information LLC proprietary index data service36 will
be based upon the current value for the components of the Disclosed Portfolio and will be
updated and widely disseminated by one or more major market data vendors and broadly
displayed at least every 15 seconds during the Regular Market Session The Intraday
Indicative Value will be based on quotes and closing prices from the securitiesrsquo local
market and may not reflect events that occur subsequent to the local marketrsquos close
Premiums and discounts between the Intraday Indicative Value and the market price may
occur This should not be viewed as a ldquoreal timerdquo update of the NAV per Share of the
Fund which is calculated only once a day
The dissemination of the Intraday Indicative Value together with the Disclosed
Portfolio will allow investors to determine the value of the underlying portfolio of the
Fund on a daily basis and will provide a close estimate of that value throughout the
trading day
Investors will also be able to obtain the Fundrsquos Statement of Additional
Information (ldquoSAIrdquo) the Fundrsquos annual and semi-annual reports (together ldquoShareholder
Reportsrdquo) and its Form N-CSR and Form N-SAR filed twice a year The Fundrsquos SAI
and Shareholder Reports will be available free upon request from the Fund and those
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or
downloaded from the Commissionrsquos website at wwwsecgov Information regarding
market price and trading volume of the Shares will be continually available on a real-time
Currently the NASDAQ OMX Global Index Data Service (ldquoGIDSrdquo) is the NASDAQ OMX global index data feed service offering real-time updates daily summary messages and access to widely followed indexes and Intraday Indicative Values for ETFs GIDS provides investment professionals with the daily information needed to track or trade NASDAQ OMX indexes listed ETFs or third-party partner indexes and ETFs
36
SR-NASDAQ-2015-011 Amendment No 2 Page 21 of 64
basis throughout the day on brokersrsquo computer screens and other electronic services
Information regarding the previous dayrsquos closing price and trading volume information
for the Shares will be published daily in the financial section of newspapers Quotation
and last sale information for the Shares will be available via Nasdaq proprietary quote
and trade services as well as in accordance with the Unlisted Trading Privileges and the
Consolidated Tape Association (ldquoCTArdquo) plans for the Shares Quotation and last sale
information for the other ETFs in which the Fund will invest will be available via the
quote and trade services of their respective primary exchanges as well as in accordance
with the Unlisted Trading Privileges and the CTA plans as applicable Quotation and
last sale information for US exchange-traded options will be available via the Options
Price Reporting Authority Intraday executable price quotations on Floating Rate Debt
Instruments and other assets not traded on an exchange will be available from major
broker-dealer firms or market data vendors as well as from automated quotation systems
published or other public sources or online information services Additionally the Trade
Reporting and Compliance Engine (ldquoTRACErdquo) of the Financial Industry Regulatory
Authority (ldquoFINRArdquo) will be a source of price information for corporate bonds
privately-issued securities mortgage-backed securities and asset-backed securities to the
extent transactions in such securities are reported to TRACE37 For exchange-traded
assets intraday pricing information will be available directly from the applicable listing
exchange
Broker-dealers that are FINRA member firms have an obligation to report transactions in specified debt securities to TRACE to the extent required under applicable FINRA rules Generally such debt securities will have at issuance a maturity that exceeds one calendar year
37
SR-NASDAQ-2015-011 Amendment No 2 Page 22 of 64
Additional information regarding the Fund and the Shares including investment
strategies risks creation and redemption procedures fees Fund holdings disclosure
policies distributions and taxes will be included in the Registration Statement
Initial and Continued Listing
The Shares will be subject to Rule 5735 which sets forth the initial and continued
listing criteria applicable to Managed Fund Shares The Exchange represents that for
initial andor continued listing the Fund must be in compliance with Rule 10A-338 under
the Act A minimum of 100000 Shares will be outstanding at the commencement of
trading on the Exchange The Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the NAV and the
Disclosed Portfolio will be made available to all market participants at the same time
Trading Halts
With respect to trading halts the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading in the Shares of the Fund Nasdaq will
halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12) Trading may be
halted because of market conditions or for reasons that in the view of the Exchange
make trading in the Shares inadvisable These may include (1) the extent to which
trading is not occurring in the securities andor the other assets constituting the Disclosed
Portfolio of the Fund or (2) whether other unusual conditions or circumstances
detrimental to the maintenance of a fair and orderly market are present Trading in the
See 17 CFR 24010A-3 38
SR-NASDAQ-2015-011 Amendment No 2 Page 23 of 64
Shares also will be subject to Rule 5735(d)(2)(D) which sets forth circumstances under
which Shares of the Fund may be halted
Trading Rules
Nasdaq deems the Shares to be equity securities thus rendering trading in the
Shares subject to Nasdaqrsquos existing rules governing the trading of equity securities
Nasdaq will allow trading in the Shares from 400 am until 800 pm Eastern Time
The Exchange has appropriate rules to facilitate transactions in the Shares during all
trading sessions As provided in Nasdaq Rule 5735(b)(3) the minimum price variation
for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $001
Surveillance
The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws39 The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities laws
The surveillances referred to above generally focus on detecting securities trading
outside their normal patterns which could be indicative of manipulative or other violative
activity When such situations are detected surveillance analysis follows and
investigations are opened where appropriate to review the behavior of all relevant
parties for all relevant trading violations
FINRA surveils trading on the Exchange pursuant to a regulatory services agreement The Exchange is responsible for FINRArsquos performance under this regulatory services agreement
39
SR-NASDAQ-2015-011 Amendment No 2 Page 24 of 64
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 25 of 64
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
b Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
SR-NASDAQ-2015-011 Amendment No 2 Page 26 of 64
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
SR-NASDAQ-2015-011 Amendment No 2 Page 27 of 64
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
SR-NASDAQ-2015-011 Amendment No 2 Page 28 of 64
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
SR-NASDAQ-2015-011 Amendment No 2 Page 29 of 64
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
SR-NASDAQ-2015-011 Amendment No 2 Page 30 of 64
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
SR-NASDAQ-2015-011 Amendment No 2 Page 31 of 64
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
4 Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
5 Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received from Members Participants or Others
Written comments were neither solicited nor received
6 Extension of Time Period for Commission Action
The Exchange does not consent at this time to an extension of any time period for
Commission action
7 Basis for Summary Effectiveness Pursuant to Section 19(b)(3) or for Accelerated Effectiveness Pursuant to Section 19(b)(2)
Not applicable
8 Proposed Rule Change Based on Rules of Another Self-Regulatory Organization or of the Commission
Not applicable
9 Security-Based Swap Submissions Filed Pursuant to Section 3C of the Act
Not applicable
SR-NASDAQ-2015-011 Amendment No 2 Page 32 of 64
10 Advance Notices Filed Pursuant to Section 806(e) of the Payment Clearing and Settlement Supervision Act
Not applicable
11 Exhibits
1 Completed notice of proposed rule change for publication in the Federal
Register
SR-NASDAQ-2015-011 Amendment No 2 Page 33 of 64
EXHIBIT 1
SECURITIES AND EXCHANGE COMMISSION (Release No 34shy File No SR-NASDAQ-2015-011)
April __ 2015
Self-Regulatory Organizations The NASDAQ Stock Market LLC Notice of Filing of Proposed Rule Change Relating to the Listing and Trading of the Shares of the First Trust Strategic Floating Rate ETF of First Trust Exchange-Traded Fund IV
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (ldquoActrdquo)1 and
Rule 19b-4 thereunder2 notice is hereby given that on February 12 2015 The NASDAQ
Stock Market LLC (ldquoNasdaqrdquo or the ldquoExchangerdquo) filed with the Securities and Exchange
Commission (ldquoCommissionrdquo) the proposed rule change as described in in Items I II and
III below which Items have been prepared by Nasdaq On April 6 2015 Nasdaq filed
Amendment No 1 which replaced the text of the original filing in its entirety On April
15 2015 Nasdaq filed Amendment No 2 which replaced the text of the original filing in
its entirety The Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons
I Self-Regulatory Organizationrsquos Statement of the Terms of Substance of the Proposed Rule Change
Nasdaq proposes to list and trade the shares of the First Trust Strategic Floating
Rate ETF (the ldquoFundrdquo) of the First Trust Strategic Floating Rate ETF (the ldquoFundrdquo) of
First Trust Exchange-Traded Fund IV (the ldquoTrustrdquo) under Nasdaq Rule 5735 (ldquoManaged
1 15 USC 78s(b)(1)
2 17 CFR 24019b-4
SR-NASDAQ-2015-011 Amendment No 2 Page 34 of 64
Fund Sharesrdquo)3 The shares of the Fund are collectively referred to herein as the
ldquoSharesrdquo
The text of the proposed rule change is available at
httpnasdaqcchwallstreetcom at Nasdaqrsquos principal office and at the Commissionrsquos
Public Reference Room
II Self-Regulatory Organizationrsquos Statement of the Purpose of and Statutory Basis for the Proposed Rule Change
In its filing with the Commission Nasdaq included statements concerning the
purpose of and basis for the proposed rule change The text of these statements may be
examined at the places specified in Item IV below Nasdaq has prepared summaries set
forth in Sections A B and C below of the most significant aspects of such statements
A Self-Regulatory Organizationrsquos Statement of the Purpose of and Statutory Basis for the Proposed Rule Change
1 Purpose
The Exchange proposes to list and trade the Shares of the Fund under Nasdaq
Rule 5735 which governs the listing and trading of Managed Fund Shares4 on the
3 The Commission approved Nasdaq Rule 5735 in Securities Exchange Act Release No 57962 (June 13 2008) 73 FR 35175 (June 20 2008) (SR-NASDAQ-2008shy039) There are already multiple actively-managed funds listed on the Exchange see eg Securities Exchange Act Release Nos 69464 (April 26 2013) 78 FR 25774 (May 2 2013) (SR-NASDAQ-2013-036) (order approving listing and trading of First Trust Senior Loan Fund) 68972 (February 22 2013) 78 FR 13721 (February 28 2013) (SR-NASDAQ-2012-147) (order approving listing and trading of First Trust High Yield LongShort ETF) 66489 (February 29 2012) 77 FR 13379 (March 6 2012) (SR-NASDAQ-2012-004) (order approving listing and trading of WisdomTree Emerging Markets Corporate Bond Fund) The Exchange believes the proposed rule change raises no significant issues not previously addressed in those prior Commission orders
4 A Managed Fund Share is a security that represents an interest in an investment company registered under the Investment Company Act of 1940 (15 USC 80ashy
SR-NASDAQ-2015-011 Amendment No 2 Page 35 of 64
Exchange The Fund will be an actively-managed exchange-traded fund (ldquoETFrdquo) The
Shares will be offered by the Trust which was established as a Massachusetts business
trust on September 15 20105 The Trust is registered with the Commission as an
investment company and has filed a registration statement on Form N-1A (ldquoRegistration
Statementrdquo) with the Commission6 The Fund will be a series of the Trust The Fund
intends to qualify each year as a regulated investment company (ldquoRICrdquo) under
Subchapter M of the Internal Revenue Code of 1986 as amended
First Trust Advisors LP will be the investment adviser (ldquoAdviserrdquo) to the Fund
First Trust Portfolios LP (the ldquoDistributorrdquo) will be the principal underwriter and
distributor of the Fundrsquos Shares The Bank of New York Mellon Corporation (ldquoBNYrdquo)
will act as the administrator accounting agent custodian and transfer agent to the Fund
1) (the ldquo1940 Actrdquo) organized as an open-end investment company or similar entity that invests in a portfolio of securities selected by its investment adviser consistent with its investment objectives and policies In contrast an open-end investment company that issues Index Fund Shares listed and traded on the Exchange under Nasdaq Rule 5705 seeks to provide investment results that correspond generally to the price and yield performance of a specific foreign or domestic stock index fixed income securities index or combination thereof
5 The Commission has issued an order upon which the Trust may rely granting certain exemptive relief under the 1940 Act See Investment Company Act Release No 30029 (April 10 2012) (File No 812-13795) (the ldquoExemptive Reliefrdquo) In addition the Commission has issued no-action relief upon which the Trust may rely pertaining to the Fundrsquos ability to invest in derivatives notwithstanding certain representations in the application for the Exemptive Relief See Commission No-Action Letter (December 6 2012)
6 See Post-Effective Amendment No 104 to Registration Statement on Form N-1A for the Trust dated January 29 2015 (File Nos 333-174332 and 811-22559) The descriptions of the Fund and the Shares contained herein are based in part on information in the Registration Statement
7
SR-NASDAQ-2015-011 Amendment No 2 Page 36 of 64
Paragraph (g) of Rule 5735 provides that if the investment adviser to the
investment company issuing Managed Fund Shares is affiliated with a broker-dealer
such investment adviser shall erect a ldquofire wallrdquo between the investment adviser and the
broker-dealer with respect to access to information concerning the composition andor
changes to such investment company portfolio7 In addition paragraph (g) further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio Rule 5735(g) is similar
to Nasdaq Rule 5705(b)(5)(A)(i) however paragraph (g) in connection with the
establishment of a ldquofire wallrdquo between the investment adviser and the broker-dealer
reflects the applicable open-end fundrsquos portfolio not an underlying benchmark index as
is the case with index-based funds The Adviser is not a broker-dealer although it is
affiliated with the Distributor a broker-dealer The Adviser has implemented a fire wall
An investment adviser to an open-end fund is required to be registered under the Investment Advisers Act of 1940 (the ldquoAdvisers Actrdquo) As a result the Adviser and its related personnel are subject to the provisions of Rule 204A-1 under the Advisers Act relating to codes of ethics This Rule requires investment advisers to adopt a code of ethics that reflects the fiduciary nature of the relationship to clients as well as compliance with other applicable securities laws Accordingly procedures designed to prevent the communication and misuse of non-public information by an investment adviser must be consistent with Rule 204A-1 under the Advisers Act In addition Rule 206(4)-7 under the Advisers Act makes it unlawful for an investment adviser to provide investment advice to clients unless such investment adviser has (i) adopted and implemented written policies and procedures reasonably designed to prevent violation by the investment adviser and its supervised persons of the Advisers Act and the Commission rules adopted thereunder (ii) implemented at a minimum an annual review regarding the adequacy of the policies and procedures established pursuant to subparagraph (i) above and the effectiveness of their implementation and (iii) designated an individual (who is a supervised person) responsible for administering the policies and procedures adopted under subparagraph (i) above
8
SR-NASDAQ-2015-011 Amendment No 2 Page 37 of 64
with respect to its broker-dealer affiliate regarding access to information concerning the
composition andor changes to the portfolio In addition personnel who make decisions
on the Fundrsquos portfolio composition will be subject to procedures designed to prevent the
use and dissemination of material non-public information regarding the Fundrsquos portfolio
In the event (a) the Adviser becomes or becomes newly affiliated with a broker-dealer
or (b) any new adviser or sub-adviser is a registered broker-dealer or becomes affiliated
with another broker-dealer it will implement a fire wall with respect to its relevant
personnel andor such broker-dealer affiliate as applicable regarding access to
information concerning the composition andor changes to the portfolio and will be
subject to procedures designed to prevent the use and dissemination of material
non-public information regarding such portfolio The Fund does not currently intend to
use a sub-adviser
First Trust Strategic Floating Rate ETF
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions8 at least 80 of its
The term ldquounder normal market conditionsrdquo as used herein includes but is not limited to the absence of adverse market economic political or other conditions including extreme volatility or trading halts in the fixed income markets or the financial markets generally operational issues causing dissemination of inaccurate market information or force majeure type events such as systems failure natural or man-made disaster act of God armed conflict act of terrorism riot or labor disruption or any similar intervening circumstance For temporary defensive purposes during the initial invest-up period and during periods of high cash inflows or outflows the Fund may depart from its principal investment strategies for example it may hold a higher than normal proportion of its assets in cash During such periods the Fund may not be able to achieve its investment objective The Fund may adopt a defensive strategy when the Adviser believes securities in which the Fund normally invests have elevated risks due to political or economic factors and in other extraordinary circumstances
SR-NASDAQ-2015-011 Amendment No 2 Page 38 of 64
net assets in a portfolio of the following types of floating-rate9 debt instruments issued by
US and non-US public- and private-sector entities floating-rate corporate10 and
government bonds and notes floating-rate agency securities 11 floating-rate instruments
of non-US issuers floating-rate privately-issued securities 12 floating-rate asset-backed
securities 13 floating-rate mortgage-backed securities14 floating-rate loans 15 and
9 For the avoidance of doubt the term ldquofloating-raterdquo shall also include similar terms such as ldquovariable-raterdquo and ldquoadjustable-raterdquo
10 The Adviser expects that under normal market conditions generally for a corporate bond to be considered as an eligible investment after taking into account such an investment at least 75 of the Fundrsquos net assets that are invested in floating-rate corporate bonds and as described below fixed-rate corporate bonds (in the aggregate) will be comprised of corporate bonds that have at the time of original issuance $100 million or more par amount outstanding
11 ldquoAgency securitiesrdquo for these purposes generally includes securities issued by the following entities Government National Mortgage Association (Ginnie Mae) Federal National Mortgage Association (Fannie Mae) Federal Home Loan Banks (FHLBanks) Federal Home Loan Mortgage Corporation (Freddie Mac) Farm Credit System (FCS) Farm Credit Banks (FCBanks) Student Loan Marketing Association (Sallie Mae) Resolution Funding Corporation (REFCORP) Financing Corporation (FICO) and the Farm Credit System (FCS) Financial Assistance Corporation (FAC) Agency securities can include but are not limited to mortgage-backed securities
12 ldquoPrivately-issued securitiesrdquo for these purposes generally includes Rule 144A securities other than mortgage-backed Rule 144A securities Under normal market conditions privately-issued securities will have at the time of original issuance $100 million or more principal amount outstanding to be considered eligible investments
13 Asset-backed securities are securities that are backed by a pool of assets The Fund currently intends to invest in asset-backed securities that are consumer asset-backed securities
14 Mortgage-backed securities which are securities that directly or indirectly represent a participation in or are secured by and payable from mortgage loans on real property will consist of (1) residential mortgage-backed securities (ldquoRMBSrdquo) (2) commercial mortgage-backed securities (ldquoCMBSrdquo) (3) stripped mortgage-backed securities (ldquoSMBSrdquo) which are mortgage-backed securities
SR-NASDAQ-2015-011 Amendment No 2 Page 39 of 64
investment companies16 (including investment companies advised by the Adviser) that
invest primarily in the foregoing types of debt instruments17 (collectively ldquoFloating Rate
Debt Instrumentsrdquo)
where mortgage payments are divided between paying the loanrsquos principal and paying the loanrsquos interest (4) collateralized mortgage obligations (ldquoCMOsrdquo) and real estate mortgage investment conduits (ldquoREMICsrdquo) which are mortgage-backed securities that are divided into multiple classes with each class being entitled to a different share of the principal and interest payments received from the pool of underlying assets
15 The floating-rate loans in which the Fund will invest will represent amounts borrowed by companies or other entities from banks and other lenders and a significant portion of such floating-rate loans may be rated below investment grade or unrated Floating-rate loans held by the Fund may be senior or subordinate obligations of the borrower and may or may not be secured by collateral First lien senior secured floating-rate loans are referred to herein as ldquosenior loansrdquo Floating-rate loans that are not senior loans (ie unsecured floating-rate loans and secured floating-rate loans that are not first lien floating-rate loans) are referred to herein as ldquojunior loansrdquo The Fund will generally invest in floating-rate loans that the Adviser deems to be liquid with readily available prices notwithstanding the foregoing the Fund may invest in floating-rate loans that are deemed illiquid so long as the Fund complies with the 15 limitation on investments of its net assets in illiquid assets described below under ldquoInvestment Restrictionsrdquo
16 The Fund currently anticipates investing only in registered open-end investment companies that are listed and traded in the US on registered exchanges (ie other ETFs) An ETF is an investment company registered under the 1940 Act that holds a portfolio of securities Many ETFs are designed to track the performance of a securities index including industry sector country and region indexes The Fund may invest in the securities of ETFs in excess of the limits imposed under the 1940 Act pursuant to exemptive orders obtained by other ETFs and their sponsors from the Commission In addition the Fund may invest in the securities of certain investment companies in excess of the limits imposed under the 1940 Act pursuant to an exemptive order obtained by the Trust and the Adviser from the Commission See Investment Company Act Release No 30377 (February 5 2013) (File No 812-13895) The ETFs in which the Fund may invest include Index Fund Shares (as described in Nasdaq Rule 5705) Portfolio Depository Receipts (as described in Nasdaq Rule 5705) and Managed Fund Shares (as described in Nasdaq Rule 5735) While the Fund may invest in inverse ETFs the Fund will not invest in leveraged or inverse leveraged (eg 2X or -3X) ETFs
SR-NASDAQ-2015-011 Amendment No 2 Page 40 of 64
At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade To be considered
ldquoinvestment graderdquo under normal market conditions rated Floating Rate Debt
Instruments will carry at the time of purchase a rating in the highest four rating
categories of at least one nationally recognized statistical ratings organization
(ldquoNRSROrdquo) (eg BBB- or higher by Standard amp Poorrsquos Ratings Services (ldquoSampPrdquo)
andor Fitch Ratings (ldquoFitchrdquo) or Baa3 or higher by Moodyrsquos Investors Service Inc
(ldquoMoodyrsquosrdquo)18 For unrated securities to be considered ldquoinvestment graderdquo under normal
market conditions such securities will be determined at the time of purchase to be of
comparable quality19 by the Adviser The Fund may invest up to 35 of its net assets in
securities that are at the time of investment rated below investment grade by each
NRSRO rating such securities (or securities that are unrated and determined by the
17 The liquidity of a security especially in the case of asset-backed and mortgage-backed securities will be a substantial factor in the Fundrsquos security selection process Consistent with the discussion below under ldquoInvestment Restrictionsrdquo the Fund will not purchase any Floating Rate Debt Instruments (including asset-backed securities and mortgage-backed securities) that in the Adviserrsquos opinion are illiquid if as a result more than 15 of the value of the Fundrsquos net assets will be invested in illiquid assets
18 For the avoidance of doubt if a security is rated by multiple NRSROs and receives different ratings the Fund will treat the security as being rated in the highest rating category received from an NRSRO
19 Comparable quality of unrated securities will be determined by the Adviser based on fundamental credit analysis of the unrated security and comparable NRSRO-rated securities On a best efforts basis the Adviser will attempt to make a rating determination based on publicly available data In making a ldquocomparable qualityrdquo determination the Adviser may consider for example whether the issuer of the security has issued other rated securities the nature and provisions of the relevant security whether the obligations under the relevant security are guaranteed by another entity and the rating of such guarantor (if any) relevant cash flows macroeconomic analysis andor sector or industry analysis
SR-NASDAQ-2015-011 Amendment No 2 Page 41 of 64
Adviser to be of comparable quality) commonly referred to as ldquohigh yieldrdquo or ldquojunkrdquo
bonds If subsequent to purchase by the Fund a security held by the Fund experiences a
decline in credit quality and falls below investment grade the Fund may continue to hold
the security and it will not cause the Fund to violate the 35 investment limitation
however the security will be taken into account for purposes of determining whether
purchases of additional securities will cause the Fund to violate such limitation
The Fund will limit its investments in asset-backed securities (excluding agency
mortgage-backed securities) and non-agency mortgage-backed securities (in the
aggregate) to 20 of its net assets20 In addition the Fund will limit its investments in
junior loans to 20 of its net assets
The Fund will hold debt securities (including in the aggregate Floating Rate
Debt Instruments and the fixed-rate debt securities described below) of at least 13
non-affiliated issuers
Other Investments
Under normal market conditions the Fund will invest primarily in the Floating
Rate Debt Instruments described above to meet its investment objective In addition the
Fund may invest up to 20 of its net assets in the following types of fixed-rate debt
securities corporate21 and government bonds and notes agency securities22 instruments
20 For the avoidance of doubt there is no limitation on the Fundrsquos investments in agency mortgage-backed securities
21 See footnote 10 above
22 See footnote 11 above
SR-NASDAQ-2015-011 Amendment No 2 Page 42 of 64
of non-US issuers in developed markets privately-issued securities 23 asset-backed
securities 24 mortgage-backed securities 25 municipal bonds money market securities26
and investment companies27 (including investment companies advised by the Adviser)
that invest primarily in the foregoing types of debt securities
Further to pursue its investment objective the Fund may invest up to 20 of the
value of its net assets in exchange-listed options on US Treasury futures contracts and
exchange-listed US Treasury futures contracts28 The use of these derivative
transactions may allow the Fund to obtain net long or short exposures to selected interest
rates These derivatives may also be used to hedge risks including interest rate risks and
credit risks associated with the Fundrsquos portfolio investments The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
23 See footnote 12 above
24 See footnote 13 above
25 See footnote 14 above
26 ldquoMoney market securitiesrdquo for these purposes generally includes short-term high-quality obligations issued or guaranteed by the US Treasury or the agencies or instrumentalities of the US government short-term high-quality securities issued or guaranteed by non-US governments agencies and instrumentalities repurchase agreements commercial paper (both asset-backed and non-assetshybacked) and deposits and other obligations of US and non-US banks and financial institutions
27 See footnote 16 above
28 At least 90 of the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be invested in instruments that trade in markets that are members of the Intermarket Surveillance Group (ldquoISGrdquo) (see footnote 40 below) or are parties to a comprehensive surveillance sharing agreement with the Exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 43 of 64
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index
Investment Restrictions
The Fund will not invest 25 or more of the value of its total assets in securities
of issuers in any one industry This restriction does not apply to (a) obligations issued or
guaranteed by the US government its agencies or instrumentalities or (b) securities of
other investment companies29
The Fund may hold up to an aggregate amount of 15 of its net assets in illiquid
assets (calculated at the time of investment) including Rule 144A securities deemed
illiquid by the Adviser30 The Fund will monitor its portfolio liquidity on an ongoing
basis to determine whether in light of current circumstances an adequate level of
liquidity is being maintained and will consider taking appropriate steps in order to
maintain adequate liquidity if through a change in values net assets or other
circumstances more than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid
assets include securities subject to contractual or other restrictions on resale and other
29 See Form N-1A Item 9 The Commission has taken the position that a fund is concentrated if it invests more than 25 of the value of its total assets in any one industry See eg Investment Company Act Release No 9011 (October 30 1975) 40 FR 54241 (November 21 1975)
30 In reaching liquidity decisions the Adviser may consider the following factors the frequency of trades and quotes for the security the number of dealers wishing to purchase or sell the security and the number of other potential purchasers dealer undertakings to make a market in the security and the nature of the security and the nature of the marketplace in which it trades (eg the time needed to dispose of the security the method of soliciting offers and the mechanics of transfer)
SR-NASDAQ-2015-011 Amendment No 2 Page 44 of 64
instruments that lack readily available markets as determined in accordance with
Commission staff guidance31
The Fund will not invest in non-US equity securities
Creation and Redemption of Shares
The Fund will issue and redeem Shares on a continuous basis at net asset value
(ldquoNAVrdquo)32 only in large blocks of Shares (ldquoCreation Unitsrdquo) in transactions with
authorized participants generally including broker-dealers and large institutional
investors (ldquoAuthorized Participantsrdquo) Creation Units generally will consist of 50000
Shares although this may change from time to time Creation Units however are not
expected to consist of less than 50000 Shares As described in the Registration
Statement and consistent with the Exemptive Relief the Fund will issue and redeem
Creation Units in exchange for an in-kind portfolio of instruments andor cash in lieu of
31 The Commission has stated that long-standing Commission guidelines have required open-end funds to hold no more than 15 of their net assets in illiquid securities and other illiquid assets See Investment Company Act Release No 28193 (March 11 2008) 73 FR 14618 (March 18 2008) footnote 34 See also Investment Company Act Release No 5847 (October 21 1969) 35 FR 19989 (December 31 1970) (Statement Regarding ldquoRestricted Securitiesrdquo) Investment Company Act Release No 18612 (March 12 1992) 57 FR 9828 (March 20 1992) (Revisions of Guidelines to Form N-1A) A fundrsquos portfolio security is illiquid if it cannot be disposed of in the ordinary course of business within seven days at approximately the value ascribed to it by the fund See Investment Company Act Release No 14983 (March 12 1986) 51 FR 9773 (March 21 1986) (adopting amendments to Rule 2a-7 under the 1940 Act) Investment Company Act Release No 17452 (April 23 1990) 55 FR 17933 (April 30 1990) (adopting Rule 144A under the Securities Act of 1933)
32 The NAV of the Fundrsquos Shares generally will be calculated once daily Monday through Friday as of the close of regular trading on the New York Stock Exchange generally 400 pm Eastern Time (the ldquoNAV Calculation Timerdquo) NAV per Share will be calculated by dividing the Fundrsquos net assets by the number of Fund Shares outstanding For more information regarding the valuation of Fund investments in calculating the Fundrsquos NAV see the Registration Statement
SR-NASDAQ-2015-011 Amendment No 2 Page 45 of 64
such instruments (the ldquoCreation Basketrdquo) In addition if there is a difference between the
NAV attributable to a Creation Unit and the market value of the Creation Basket
exchanged for the Creation Unit the party conveying instruments with the lower value
will pay to the other an amount in cash equal to the difference (referred to as the ldquoCash
Componentrdquo)
Creations and redemptions must be made by or through an Authorized Participant
that has executed an agreement that has been agreed to by the Distributor and BNY with
respect to creations and redemptions of Creation Units All standard orders to create
Creation Units must be received by the transfer agent no later than the closing time of the
regular trading session on the New York Stock Exchange (ordinarily 400 pm Eastern
Time) (the ldquoClosing Timerdquo) in each case on the date such order is placed in order for the
creation of Creation Units to be effected based on the NAV of Shares as next determined
on such date after receipt of the order in proper form Shares may be redeemed only in
Creation Units at their NAV next determined after receipt not later than the Closing Time
of a redemption request in proper form by the Fund through the transfer agent and only
on a business day
The Fundrsquos custodian through the National Securities Clearing Corporation will
make available on each business day prior to the opening of business of the Exchange
the list of the names and quantities of the instruments comprising the Creation Basket as
well as the estimated Cash Component (if any) for that day The published Creation
Basket will apply until a new Creation Basket is announced on the following business
day prior to commencement of trading in the Shares
SR-NASDAQ-2015-011 Amendment No 2 Page 46 of 64
Net Asset Value
The Fundrsquos NAV will be determined as of the close of trading (normally
400 pm Eastern Time) on each day the New York Stock Exchange is open for
business NAV will be calculated for the Fund by taking the market price of the Fundrsquos
total assets including interest or dividends accrued but not yet collected less all
liabilities and dividing such amount by the total number of Shares outstanding The
result rounded to the nearest cent will be the NAV per Share All valuations will be
subject to review by the Board of Trustees of the Trust (ldquoTrust Boardrdquo) or its delegate
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with valuation procedures (which may be revised from time to time) adopted by the Trust
Board (the ldquoValuation Proceduresrdquo) and in accordance with the 1940 Act A market
valuation generally means a valuation (i) obtained from an exchange an independent
pricing service (ldquoPricing Servicerdquo) or a major market maker (or dealer) or (ii) based on a
price quotation or other equivalent indication of value supplied by an exchange a Pricing
Service or a major market maker (or dealer) The information summarized below is
based on the Valuation Procedures as currently in effect however as noted above the
Valuation Procedures are amended from time to time and therefore such information is
subject to change
Certain securities including Floating Rate Debt Instruments in which the Fund
may invest will not be listed on any securities exchange or board of trade Such
securities will typically be bought and sold by institutional investors in individually
negotiated private transactions that function in many respects like an over-the-counter
SR-NASDAQ-2015-011 Amendment No 2 Page 47 of 64
secondary market although typically no formal market makers will exist Certain
securities particularly debt securities will have few or no trades or trade infrequently
and information regarding a specific security may not be widely available or may be
incomplete Accordingly determinations of the fair value of debt securities may be
based on infrequent and dated information Because there is less reliable objective data
available elements of judgment may play a greater role in valuation of debt securities
than for other types of securities Typically Floating Rate Debt Instruments and other
debt securities in which the Fund may invest (other than those described below) will be
valued using information provided by a Pricing Service Debt securities having a
remaining maturity of 60 days or less when purchased will be valued at cost adjusted for
amortization of premiums and accretion of discounts provided the Adviserrsquos pricing
committee (the ldquoPricing Committeerdquo) has determined that the use of amortized cost is an
appropriate reflection of fair value given market and issuer-specific conditions existing at
the time of the determination Overnight repurchase agreements will be valued at cost
and term repurchase agreements (ie those whose maturity exceeds seven days) will be
valued at the average of the bid quotations obtained daily from at least two recognized
dealers
Asset-backed and mortgage-backed securities will generally be valued by using a
Pricing Service If a Pricing Service does not cover a particular asset-backed or
mortgage-backed security or discontinues covering a particular asset-backed or
mortgage-backed security the security will be priced using broker quotes generally
provided by brokers that make or participate in markets in the security To derive values
Pricing Services and broker-dealers may use matrix pricing and valuation models as well
SR-NASDAQ-2015-011 Amendment No 2 Page 48 of 64
as recent market transactions for the same or similar assets As it deems appropriate the
Pricing Committee may determine that a Pricing Service price does not represent an
accurate value of an asset-backed or mortgage-backed security based on broker quotes it
receives a recent trade in the security by the Fund information from a portfolio manager
or other market information In the event that the Pricing Committee determines that the
Pricing Service price is unreliable or inaccurate based on such other information broker
quotes may be used Additionally if the Pricing Committee determines that the price of
an asset-backed or mortgage-backed security obtained from a Pricing Service and
available broker quotes is unreliable or inaccurate due to market conditions or other
reasons or if a Pricing Service price or broker quote is unavailable the security will be
valued using fair value pricing as described below
Equity securities listed on any exchange other than the Exchange will be valued at
the last sale price on the exchange on which they are principally traded on the business
day as of which such value is being determined Equity securities listed on the Exchange
will be valued at the official closing price on the business day as of which such value is
being determined If there has been no sale on such day or no official closing price in
the case of securities traded on the Exchange the securities will be valued using fair
value pricing as described below Equity securities traded on more than one securities
exchange will be valued at the last sale price or official closing price as applicable on
the business day as of which such value is being determined at the close of the exchange
representing the principal market for such securities
Exchange-traded options and futures contracts will be valued at the closing price
in the market where such contracts are principally traded
SR-NASDAQ-2015-011 Amendment No 2 Page 49 of 64
Certain securities including Floating Rate Debt Instruments in which the Fund
will invest will not be able to be priced by pre-established pricing methods Such
securities may be valued by the Trust Board or its delegate at fair value The use of fair
value pricing by the Fund will be governed by the Valuation Procedures and conducted in
accordance with the provisions of the 1940 Act Valuing the Fundrsquos securities using fair
value pricing will result in using prices for those securities that may differ from current
market valuations or official closing prices on the applicable exchange
Availability of Information
The Fundrsquos website (wwwftportfolioscom) which will be publicly available
prior to the public offering of Shares will include a form of the prospectus for the Fund
that may be downloaded The website will include the Sharesrsquo ticker CUSIP and
exchange information along with additional quantitative information updated on a daily
basis including for the Fund (1) daily trading volume the prior business dayrsquos reported
NAV and closing price mid-point of the bidask spread at the time of calculation of such
NAV (the ldquoBidAsk Pricerdquo)33 and a calculation of the premium and discount of the
BidAsk Price against the NAV and (2) data in chart format displaying the frequency
distribution of discounts and premiums of the daily BidAsk Price against the NAV
within appropriate ranges for each of the four previous calendar quarters On each
business day before commencement of trading in Shares in the Regular Market Session34
33 The BidAsk Price of the Fund will be determined using the mid-point of the highest bid and the lowest offer on the Exchange as of the time of calculation of the Fundrsquos NAV The records relating to BidAsk Prices will be retained by the Fund and its service providers
34 See Nasdaq Rule 4120(b)(4) (describing the three trading sessions on the Exchange (1) Pre-Market Session from 4 am to 930 am Eastern Time (2)
SR-NASDAQ-2015-011 Amendment No 2 Page 50 of 64
on the Exchange the Fund will disclose on its website the identities and quantities of the
portfolio of securities and other assets (the ldquoDisclosed Portfoliordquo as defined in Nasdaq
Rule 5735(c)(2)) held by the Fund that will form the basis for the Fundrsquos calculation of
NAV at the end of the business day 35 The Fundrsquos disclosure of derivative positions in
the Disclosed Portfolio will include information that market participants can use to value
these positions intraday On a daily basis the Fund will disclose on the Fundrsquos website
the following information regarding each portfolio holding as applicable to the type of
holding ticker symbol CUSIP number or other identifier if any a description of the
holding (including the type of holding) the identity of the security or other asset or
instrument underlying the holding if any for options the option strike price quantity
held (as measured by for example par value notional value or number of shares
contracts or units) maturity date if any coupon rate if any effective date if any market
value of the holding and percentage weighting of the holding in the Fundrsquos portfolio
The website information will be publicly available at no charge
In addition for the Fund an estimated value defined in Rule 5735(c)(3) as the
ldquoIntraday Indicative Valuerdquo that reflects an estimated intraday value of the Fundrsquos
Disclosed Portfolio will be disseminated Moreover the Intraday Indicative Value
Regular Market Session from 930 am to 4 pm or 415 pm Eastern Time and (3) Post-Market Session from 4 pm or 415 pm to 8 pm Eastern Time)
Under accounting procedures to be followed by the Fund trades made on the prior business day (ldquoTrdquo) will be booked and reflected in NAV on the current business day (ldquoT+1rdquo) Accordingly the Fund will be able to disclose at the beginning of the business day the portfolio that will form the basis for the NAV calculation at the end of the business day
35
SR-NASDAQ-2015-011 Amendment No 2 Page 51 of 64
available on the NASDAQ OMX Information LLC proprietary index data service36 will
be based upon the current value for the components of the Disclosed Portfolio and will be
updated and widely disseminated by one or more major market data vendors and broadly
displayed at least every 15 seconds during the Regular Market Session The Intraday
Indicative Value will be based on quotes and closing prices from the securitiesrsquo local
market and may not reflect events that occur subsequent to the local marketrsquos close
Premiums and discounts between the Intraday Indicative Value and the market price may
occur This should not be viewed as a ldquoreal timerdquo update of the NAV per Share of the
Fund which is calculated only once a day
The dissemination of the Intraday Indicative Value together with the Disclosed
Portfolio will allow investors to determine the value of the underlying portfolio of the
Fund on a daily basis and will provide a close estimate of that value throughout the
trading day
Investors will also be able to obtain the Fundrsquos Statement of Additional
Information (ldquoSAIrdquo) the Fundrsquos annual and semi-annual reports (together ldquoShareholder
Reportsrdquo) and its Form N-CSR and Form N-SAR filed twice a year The Fundrsquos SAI
and Shareholder Reports will be available free upon request from the Fund and those
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or
downloaded from the Commissionrsquos website at wwwsecgov Information regarding
Currently the NASDAQ OMX Global Index Data Service (ldquoGIDSrdquo) is the NASDAQ OMX global index data feed service offering real-time updates daily summary messages and access to widely followed indexes and Intraday Indicative Values for ETFs GIDS provides investment professionals with the daily information needed to track or trade NASDAQ OMX indexes listed ETFs or third-party partner indexes and ETFs
36
SR-NASDAQ-2015-011 Amendment No 2 Page 52 of 64
market price and trading volume of the Shares will be continually available on a real-time
basis throughout the day on brokersrsquo computer screens and other electronic services
Information regarding the previous dayrsquos closing price and trading volume information
for the Shares will be published daily in the financial section of newspapers Quotation
and last sale information for the Shares will be available via Nasdaq proprietary quote
and trade services as well as in accordance with the Unlisted Trading Privileges and the
Consolidated Tape Association (ldquoCTArdquo) plans for the Shares Quotation and last sale
information for the other ETFs in which the Fund will invest will be available via the
quote and trade services of their respective primary exchanges as well as in accordance
with the Unlisted Trading Privileges and the CTA plans as applicable Quotation and
last sale information for US exchange-traded options will be available via the Options
Price Reporting Authority Intraday executable price quotations on Floating Rate Debt
Instruments and other assets not traded on an exchange will be available from major
broker-dealer firms or market data vendors as well as from automated quotation systems
published or other public sources or online information services Additionally the Trade
Reporting and Compliance Engine (ldquoTRACErdquo) of the Financial Industry Regulatory
Authority (ldquoFINRArdquo) will be a source of price information for corporate bonds
privately-issued securities mortgage-backed securities and asset-backed securities to the
extent transactions in such securities are reported to TRACE37 For exchange-traded
Broker-dealers that are FINRA member firms have an obligation to report transactions in specified debt securities to TRACE to the extent required under applicable FINRA rules Generally such debt securities will have at issuance a maturity that exceeds one calendar year
37
SR-NASDAQ-2015-011 Amendment No 2 Page 53 of 64
assets intraday pricing information will be available directly from the applicable listing
exchange
Additional information regarding the Fund and the Shares including investment
strategies risks creation and redemption procedures fees Fund holdings disclosure
policies distributions and taxes will be included in the Registration Statement
Initial and Continued Listing
The Shares will be subject to Rule 5735 which sets forth the initial and continued
listing criteria applicable to Managed Fund Shares The Exchange represents that for
initial andor continued listing the Fund must be in compliance with Rule 10A-338 under
the Act A minimum of 100000 Shares will be outstanding at the commencement of
trading on the Exchange The Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the NAV and the
Disclosed Portfolio will be made available to all market participants at the same time
Trading Halts
With respect to trading halts the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading in the Shares of the Fund Nasdaq will
halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12) Trading may be
halted because of market conditions or for reasons that in the view of the Exchange
make trading in the Shares inadvisable These may include (1) the extent to which
trading is not occurring in the securities andor the other assets constituting the Disclosed
Portfolio of the Fund or (2) whether other unusual conditions or circumstances
See 17 CFR 24010A-3 38
SR-NASDAQ-2015-011 Amendment No 2 Page 54 of 64
detrimental to the maintenance of a fair and orderly market are present Trading in the
Shares also will be subject to Rule 5735(d)(2)(D) which sets forth circumstances under
which Shares of the Fund may be halted
Trading Rules
Nasdaq deems the Shares to be equity securities thus rendering trading in the
Shares subject to Nasdaqrsquos existing rules governing the trading of equity securities
Nasdaq will allow trading in the Shares from 400 am until 800 pm Eastern Time
The Exchange has appropriate rules to facilitate transactions in the Shares during all
trading sessions As provided in Nasdaq Rule 5735(b)(3) the minimum price variation
for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $001
Surveillance
The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws39 The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities laws
The surveillances referred to above generally focus on detecting securities trading
outside their normal patterns which could be indicative of manipulative or other violative
activity When such situations are detected surveillance analysis follows and
FINRA surveils trading on the Exchange pursuant to a regulatory services agreement The Exchange is responsible for FINRArsquos performance under this regulatory services agreement
39
SR-NASDAQ-2015-011 Amendment No 2 Page 55 of 64
investigations are opened where appropriate to review the behavior of all relevant
parties for all relevant trading violations
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 56 of 64
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
SR-NASDAQ-2015-011 Amendment No 2 Page 57 of 64
2 Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
SR-NASDAQ-2015-011 Amendment No 2 Page 58 of 64
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
SR-NASDAQ-2015-011 Amendment No 2 Page 59 of 64
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
SR-NASDAQ-2015-011 Amendment No 2 Page 60 of 64
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 61 of 64
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
SR-NASDAQ-2015-011 Amendment No 2 Page 62 of 64
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
B Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
C Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received From Members Participants or Others
Written comments were neither solicited nor received
III Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Within 45 days of the date of publication of this notice in the Federal Register or
within such longer period (i) as the Commission may designate up to 90 days of such date
if it finds such longer period to be appropriate and publishes its reasons for so finding or
(ii) as to which the Exchange consents the Commission shall (a) by order approve or
disapprove such proposed rule change or (b) institute proceedings to determine whether
the proposed rule change should be disapproved
SR-NASDAQ-2015-011 Amendment No 2 Page 63 of 64
IV Solicitation of Comments
Interested persons are invited to submit written data views and arguments
concerning the foregoing including whether the proposed rule change is consistent with
the Act Comments may be submitted by any of the following methods
Electronic comments
bull Use the Commissionrsquos Internet comment form
(httpwwwsecgovrulessroshtml) or
bull Send an e-mail to rule-commentssecgov Please include File Number
SR-NASDAQ-2015-011 on the subject line
Paper comments
bull Send paper comments in triplicate to Brent J Fields Secretary Securities and
Exchange Commission Station Place 100 F Street NE Washington DC
20549-9303
All submissions should refer to File Number SR-NASDAQ-2015-011 This file number
should be included on the subject line if e-mail is used To help the Commission process
and review your comments more efficiently please use only one method The
Commission will post all comments on the Commissionrsquos Internet website
httpwwwsecgovrulessroshtml
Copies of the submission all subsequent amendments all written statements with
respect to the proposed rule change that are filed with the Commission and all written
communications relating to the proposed rule change between the Commission and any
person other than those that may be withheld from the public in accordance with the
provisions of 5 USC 552 will be available for website viewing and printing in the
Commissionrsquos Public Reference Room 100 F Street NE Washington DC 20549 on
SR-NASDAQ-2015-011 Amendment No 2 Page 64 of 64
official business days between the hours of 1000 am and 300 pm Copies of the filing
also will be available for inspection and copying at the principal office of Nasdaq All
comments received will be posted without change the Commission does not edit
personal identifying information from submissions You should submit only information
that you wish to make available publicly
All submissions should refer to File Number SR-NASDAQ-2015-011 and should
be submitted on or before [insert date 21 days from publication in the Federal Register]
For the Commission by the Division of Trading and Markets pursuant to
delegated authority41
Kevin M OrsquoNeill Deputy Secretary
17 CFR 20030-3(a)(12) 41
SR-NASDAQ-2015-011 Amendment No 2 Page 3 of 64
1 Text of Proposed Rule Change
(a) Pursuant to the provisions of Section 19(b)(1) of the Securities Exchange Act
of 1934 (ldquoActrdquo)1 and Rule 19b-4 thereunder2 The NASDAQ Stock Market LLC
(ldquoNasdaqrdquo or the ldquoExchangerdquo) is filing with the Securities and Exchange Commission
(ldquoCommissionrdquo) a proposed rule change to list and trade the shares of the First Trust
Strategic Floating Rate ETF (the ldquoFundrdquo) of First Trust Exchange-Traded Fund IV (the
ldquoTrustrdquo) under Nasdaq Rule 5735 (ldquoManaged Fund Sharesrdquo) 3 The shares of the Fund
are collectively referred to herein as the ldquoSharesrdquo
(b) and (c) Not applicable
2 Procedures of the Self-Regulatory Organization
The proposed rule change was approved by senior management of the Exchange
pursuant to authority delegated by the Board of Directors of the Exchange (the ldquoBoardrdquo)
on July 17 2013 Exchange staff will advise the Board of any action taken pursuant to
delegated authority No other action by the Exchange is necessary for the filing of the
rule change
1 15 USC 78s(b)(1)
2 17 CFR 24019b-4
3 The Commission approved Nasdaq Rule 5735 in Securities Exchange Act Release No 57962 (June 13 2008) 73 FR 35175 (June 20 2008) (SR-NASDAQ-2008shy039) There are already multiple actively-managed funds listed on the Exchange see eg Securities Exchange Act Release Nos 69464 (April 26 2013) 78 FR 25774 (May 2 2013) (SR-NASDAQ-2013-036) (order approving listing and trading of First Trust Senior Loan Fund) 68972 (February 22 2013) 78 FR 13721 (February 28 2013) (SR-NASDAQ-2012-147) (order approving listing and trading of First Trust High Yield LongShort ETF) 66489 (February 29 2012) 77 FR 13379 (March 6 2012) (SR-NASDAQ-2012-004) (order approving listing and trading of WisdomTree Emerging Markets Corporate Bond Fund) The Exchange believes the proposed rule change raises no significant issues not previously addressed in those prior Commission orders
SR-NASDAQ-2015-011 Amendment No 2 Page 4 of 64
Questions regarding this rule filing may be directed to Jonathan F Cayne Senior
Associate General Counsel The NASDAQ OMX Group at (301) 978-8493 (telephone)
3 Self-Regulatory Organizationrsquos Statement of the Purpose of and Statutory Basis for the Proposed Rule Change
a Purpose
The Exchange proposes to list and trade the Shares of the Fund under Nasdaq
Rule 5735 which governs the listing and trading of Managed Fund Shares4 on the
Exchange The Fund will be an actively-managed exchange-traded fund (ldquoETFrdquo) The
Shares will be offered by the Trust which was established as a Massachusetts business
trust on September 15 20105 The Trust is registered with the Commission as an
investment company and has filed a registration statement on Form N-1A (ldquoRegistration
Statementrdquo) with the Commission 6 The Fund will be a series of the Trust The Fund
4 A Managed Fund Share is a security that represents an interest in an investment company registered under the Investment Company Act of 1940 (15 USC 80ashy1) (the ldquo1940 Actrdquo) organized as an open-end investment company or similar entity that invests in a portfolio of securities selected by its investment adviser consistent with its investment objectives and policies In contrast an open-end investment company that issues Index Fund Shares listed and traded on the Exchange under Nasdaq Rule 5705 seeks to provide investment results that correspond generally to the price and yield performance of a specific foreign or domestic stock index fixed income securities index or combination thereof
5 The Commission has issued an order upon which the Trust may rely granting certain exemptive relief under the 1940 Act See Investment Company Act Release No 30029 (April 10 2012) (File No 812-13795) (the ldquoExemptive Reliefrdquo) In addition the Commission has issued no-action relief upon which the Trust may rely pertaining to the Fundrsquos ability to invest in derivatives notwithstanding certain representations in the application for the Exemptive Relief See Commission No-Action Letter (December 6 2012)
6 See Post-Effective Amendment No 104 to Registration Statement on Form N-1A for the Trust dated January 29 2015 (File Nos 333-174332 and 811-22559) The descriptions of the Fund and the Shares contained herein are based in part on information in the Registration Statement
7
SR-NASDAQ-2015-011 Amendment No 2 Page 5 of 64
intends to qualify each year as a regulated investment company (ldquoRICrdquo) under
Subchapter M of the Internal Revenue Code of 1986 as amended
First Trust Advisors LP will be the investment adviser (ldquoAdviserrdquo) to the Fund
First Trust Portfolios LP (the ldquoDistributorrdquo) will be the principal underwriter and
distributor of the Fundrsquos Shares The Bank of New York Mellon Corporation (ldquoBNYrdquo)
will act as the administrator accounting agent custodian and transfer agent to the Fund
Paragraph (g) of Rule 5735 provides that if the investment adviser to the
investment company issuing Managed Fund Shares is affiliated with a broker-dealer
such investment adviser shall erect a ldquofire wallrdquo between the investment adviser and the
broker-dealer with respect to access to information concerning the composition andor
changes to such investment company portfolio7 In addition paragraph (g) further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio Rule 5735(g) is similar
An investment adviser to an open-end fund is required to be registered under the Investment Advisers Act of 1940 (the ldquoAdvisers Actrdquo) As a result the Adviser and its related personnel are subject to the provisions of Rule 204A-1 under the Advisers Act relating to codes of ethics This Rule requires investment advisers to adopt a code of ethics that reflects the fiduciary nature of the relationship to clients as well as compliance with other applicable securities laws Accordingly procedures designed to prevent the communication and misuse of non-public information by an investment adviser must be consistent with Rule 204A-1 under the Advisers Act In addition Rule 206(4)-7 under the Advisers Act makes it unlawful for an investment adviser to provide investment advice to clients unless such investment adviser has (i) adopted and implemented written policies and procedures reasonably designed to prevent violation by the investment adviser and its supervised persons of the Advisers Act and the Commission rules adopted thereunder (ii) implemented at a minimum an annual review regarding the adequacy of the policies and procedures established pursuant to subparagraph (i) above and the effectiveness of their implementation and (iii) designated an individual (who is a supervised person) responsible for administering the policies and procedures adopted under subparagraph (i) above
SR-NASDAQ-2015-011 Amendment No 2 Page 6 of 64
to Nasdaq Rule 5705(b)(5)(A)(i) however paragraph (g) in connection with the
establishment of a ldquofire wallrdquo between the investment adviser and the broker-dealer
reflects the applicable open-end fundrsquos portfolio not an underlying benchmark index as
is the case with index-based funds The Adviser is not a broker-dealer although it is
affiliated with the Distributor a broker-dealer The Adviser has implemented a fire wall
with respect to its broker-dealer affiliate regarding access to information concerning the
composition andor changes to the portfolio In addition personnel who make decisions
on the Fundrsquos portfolio composition will be subject to procedures designed to prevent the
use and dissemination of material non-public information regarding the Fundrsquos portfolio
In the event (a) the Adviser becomes or becomes newly affiliated with a broker-dealer
or (b) any new adviser or sub-adviser is a registered broker-dealer or becomes affiliated
with another broker-dealer it will implement a fire wall with respect to its relevant
personnel andor such broker-dealer affiliate as applicable regarding access to
information concerning the composition andor changes to the portfolio and will be
subject to procedures designed to prevent the use and dissemination of material
non-public information regarding such portfolio The Fund does not currently intend to
use a sub-adviser
First Trust Strategic Floating Rate ETF
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions8 at least 80 of its
The term ldquounder normal market conditionsrdquo as used herein includes but is not limited to the absence of adverse market economic political or other conditions including extreme volatility or trading halts in the fixed income markets or the financial markets generally operational issues causing dissemination of inaccurate market information or force majeure type events such as systems
8
SR-NASDAQ-2015-011 Amendment No 2 Page 7 of 64
net assets in a portfolio of the following types of floating-rate9 debt instruments issued by
US and non-US public- and private-sector entities floating-rate corporate10 and
government bonds and notes floating-rate agency securities 11 floating-rate instruments
of non-US issuers floating-rate privately-issued securities 12 floating-rate asset-backed
failure natural or man-made disaster act of God armed conflict act of terrorism riot or labor disruption or any similar intervening circumstance For temporary defensive purposes during the initial invest-up period and during periods of high cash inflows or outflows the Fund may depart from its principal investment strategies for example it may hold a higher than normal proportion of its assets in cash During such periods the Fund may not be able to achieve its investment objective The Fund may adopt a defensive strategy when the Adviser believes securities in which the Fund normally invests have elevated risks due to political or economic factors and in other extraordinary circumstances
9 For the avoidance of doubt the term ldquofloating-raterdquo shall also include similar terms such as ldquovariable-raterdquo and ldquoadjustable-raterdquo
10 The Adviser expects that under normal market conditions generally for a corporate bond to be considered as an eligible investment after taking into account such an investment at least 75 of the Fundrsquos net assets that are invested in floating-rate corporate bonds and as described below fixed-rate corporate bonds (in the aggregate) will be comprised of corporate bonds that have at the time of original issuance $100 million or more par amount outstanding
11 ldquoAgency securitiesrdquo for these purposes generally includes securities issued by the following entities Government National Mortgage Association (Ginnie Mae) Federal National Mortgage Association (Fannie Mae) Federal Home Loan Banks (FHLBanks) Federal Home Loan Mortgage Corporation (Freddie Mac) Farm Credit System (FCS) Farm Credit Banks (FCBanks) Student Loan Marketing Association (Sallie Mae) Resolution Funding Corporation (REFCORP) Financing Corporation (FICO) and the Farm Credit System (FCS) Financial Assistance Corporation (FAC) Agency securities can include but are not limited to mortgage-backed securities
12 ldquoPrivately-issued securitiesrdquo for these purposes generally includes Rule 144A securities other than mortgage-backed Rule 144A securities Under normal market conditions privately-issued securities will have at the time of original issuance $100 million or more principal amount outstanding to be considered eligible investments
SR-NASDAQ-2015-011 Amendment No 2 Page 8 of 64
securities 13 floating-rate mortgage-backed securities14 floating-rate loans 15 and
investment companies16 (including investment companies advised by the Adviser) that
13 Asset-backed securities are securities that are backed by a pool of assets The Fund currently intends to invest in asset-backed securities that are consumer asset-backed securities
14 Mortgage-backed securities which are securities that directly or indirectly represent a participation in or are secured by and payable from mortgage loans on real property will consist of (1) residential mortgage-backed securities (ldquoRMBSrdquo) (2) commercial mortgage-backed securities (ldquoCMBSrdquo) (3) stripped mortgage-backed securities (ldquoSMBSrdquo) which are mortgage-backed securities where mortgage payments are divided between paying the loanrsquos principal and paying the loanrsquos interest (4) collateralized mortgage obligations (ldquoCMOsrdquo) and real estate mortgage investment conduits (ldquoREMICsrdquo) which are mortgage-backed securities that are divided into multiple classes with each class being entitled to a different share of the principal and interest payments received from the pool of underlying assets
15 The floating-rate loans in which the Fund will invest will represent amounts borrowed by companies or other entities from banks and other lenders and a significant portion of such floating-rate loans may be rated below investment grade or unrated Floating-rate loans held by the Fund may be senior or subordinate obligations of the borrower and may or may not be secured by collateral First lien senior secured floating-rate loans are referred to herein as ldquosenior loansrdquo Floating-rate loans that are not senior loans (ie unsecured floating-rate loans and secured floating-rate loans that are not first lien floating-rate loans) are referred to herein as ldquojunior loansrdquo The Fund will generally invest in floating-rate loans that the Adviser deems to be liquid with readily available prices notwithstanding the foregoing the Fund may invest in floating-rate loans that are deemed illiquid so long as the Fund complies with the 15 limitation on investments of its net assets in illiquid assets described below under ldquoInvestment Restrictionsrdquo
16 The Fund currently anticipates investing only in registered open-end investment companies that are listed and traded in the US on registered exchanges (ie other ETFs) An ETF is an investment company registered under the 1940 Act that holds a portfolio of securities Many ETFs are designed to track the performance of a securities index including industry sector country and region indexes The Fund may invest in the securities of ETFs in excess of the limits imposed under the 1940 Act pursuant to exemptive orders obtained by other ETFs and their sponsors from the Commission In addition the Fund may invest in the securities of certain investment companies in excess of the limits imposed under the 1940 Act pursuant to an exemptive order obtained by the Trust and the Adviser from the Commission See Investment Company Act Release No 30377
SR-NASDAQ-2015-011 Amendment No 2 Page 9 of 64
invest primarily in the foregoing types of debt instruments17 (collectively ldquoFloating Rate
Debt Instrumentsrdquo)
At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade To be considered
ldquoinvestment graderdquo under normal market conditions rated Floating Rate Debt
Instruments will carry at the time of purchase a rating in the highest four rating
categories of at least one nationally recognized statistical ratings organization
(ldquoNRSROrdquo) (eg BBB- or higher by Standard amp Poorrsquos Ratings Services (ldquoSampPrdquo)
andor Fitch Ratings (ldquoFitchrdquo) or Baa3 or higher by Moodyrsquos Investors Service Inc
(ldquoMoodyrsquosrdquo)18 For unrated securities to be considered ldquoinvestment graderdquo under normal
market conditions such securities will be determined at the time of purchase to be of
comparable quality19 by the Adviser The Fund may invest up to 35 of its net assets in
(February 5 2013) (File No 812-13895) The ETFs in which the Fund may invest include Index Fund Shares (as described in Nasdaq Rule 5705) Portfolio Depository Receipts (as described in Nasdaq Rule 5705) and Managed Fund Shares (as described in Nasdaq Rule 5735) While the Fund may invest in inverse ETFs the Fund will not invest in leveraged or inverse leveraged (eg 2X or -3X) ETFs
17 The liquidity of a security especially in the case of asset-backed and mortgage-backed securities will be a substantial factor in the Fundrsquos security selection process Consistent with the discussion below under ldquoInvestment Restrictionsrdquo the Fund will not purchase any Floating Rate Debt Instruments (including asset-backed securities and mortgage-backed securities) that in the Adviserrsquos opinion are illiquid if as a result more than 15 of the value of the Fundrsquos net assets will be invested in illiquid assets
18 For the avoidance of doubt if a security is rated by multiple NRSROs and receives different ratings the Fund will treat the security as being rated in the highest rating category received from an NRSRO
19 Comparable quality of unrated securities will be determined by the Adviser based on fundamental credit analysis of the unrated security and comparable NRSRO-rated securities On a best efforts basis the Adviser will attempt to make a rating
SR-NASDAQ-2015-011 Amendment No 2 Page 10 of 64
securities that are at the time of investment rated below investment grade by each
NRSRO rating such securities (or securities that are unrated and determined by the
Adviser to be of comparable quality) commonly referred to as ldquohigh yieldrdquo or ldquojunkrdquo
bonds If subsequent to purchase by the Fund a security held by the Fund experiences a
decline in credit quality and falls below investment grade the Fund may continue to hold
the security and it will not cause the Fund to violate the 35 investment limitation
however the security will be taken into account for purposes of determining whether
purchases of additional securities will cause the Fund to violate such limitation
The Fund will limit its investments in asset-backed securities (excluding agency
mortgage-backed securities) and non-agency mortgage-backed securities (in the
aggregate) to 20 of its net assets20 In addition the Fund will limit its investments in
junior loans to 20 of its net assets
The Fund will hold debt securities (including in the aggregate Floating Rate
Debt Instruments and the fixed-rate debt securities described below) of at least 13
non-affiliated issuers
Other Investments
Under normal market conditions the Fund will invest primarily in the Floating
Rate Debt Instruments described above to meet its investment objective In addition the
determination based on publicly available data In making a ldquocomparable qualityrdquo determination the Adviser may consider for example whether the issuer of the security has issued other rated securities the nature and provisions of the relevant security whether the obligations under the relevant security are guaranteed by another entity and the rating of such guarantor (if any) relevant cash flows macroeconomic analysis andor sector or industry analysis
For the avoidance of doubt there is no limitation on the Fundrsquos investments in agency mortgage-backed securities
20
SR-NASDAQ-2015-011 Amendment No 2 Page 11 of 64
Fund may invest up to 20 of its net assets in the following types of fixed-rate debt
securities corporate21 and government bonds and notes agency securities22 instruments
of non-US issuers in developed markets privately-issued securities 23 asset-backed
securities 24 mortgage-backed securities 25 municipal bonds money market securities26
and investment companies27 (including investment companies advised by the Adviser)
that invest primarily in the foregoing types of debt securities
Further to pursue its investment objective the Fund may invest up to 20 of the
value of its net assets in exchange-listed options on US Treasury futures contracts and
exchange-listed US Treasury futures contracts28 The use of these derivative
transactions may allow the Fund to obtain net long or short exposures to selected interest
rates These derivatives may also be used to hedge risks including interest rate risks and
21 See footnote 10 above
22 See footnote 11 above
23 See footnote 12 above
24 See footnote 13 above
25 See footnote 14 above
26 ldquoMoney market securitiesrdquo for these purposes generally includes short-term high-quality obligations issued or guaranteed by the US Treasury or the agencies or instrumentalities of the US government short-term high-quality securities issued or guaranteed by non-US governments agencies and instrumentalities repurchase agreements commercial paper (both asset-backed and non-assetshybacked) and deposits and other obligations of US and non-US banks and financial institutions
27 See footnote 16 above
28 At least 90 of the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be invested in instruments that trade in markets that are members of the Intermarket Surveillance Group (ldquoISGrdquo) (see footnote 40 below) or are parties to a comprehensive surveillance sharing agreement with the Exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 12 of 64
credit risks associated with the Fundrsquos portfolio investments The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index
Investment Restrictions
The Fund will not invest 25 or more of the value of its total assets in securities
of issuers in any one industry This restriction does not apply to (a) obligations issued or
guaranteed by the US government its agencies or instrumentalities or (b) securities of
other investment companies29
The Fund may hold up to an aggregate amount of 15 of its net assets in illiquid
assets (calculated at the time of investment) including Rule 144A securities deemed
illiquid by the Adviser30 The Fund will monitor its portfolio liquidity on an ongoing
basis to determine whether in light of current circumstances an adequate level of
liquidity is being maintained and will consider taking appropriate steps in order to
maintain adequate liquidity if through a change in values net assets or other
circumstances more than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid
assets include securities subject to contractual or other restrictions on resale and other
29 See Form N-1A Item 9 The Commission has taken the position that a fund is concentrated if it invests more than 25 of the value of its total assets in any one industry See eg Investment Company Act Release No 9011 (October 30 1975) 40 FR 54241 (November 21 1975)
30 In reaching liquidity decisions the Adviser may consider the following factors the frequency of trades and quotes for the security the number of dealers wishing to purchase or sell the security and the number of other potential purchasers dealer undertakings to make a market in the security and the nature of the security and the nature of the marketplace in which it trades (eg the time needed to dispose of the security the method of soliciting offers and the mechanics of transfer)
SR-NASDAQ-2015-011 Amendment No 2 Page 13 of 64
instruments that lack readily available markets as determined in accordance with
Commission staff guidance31
The Fund will not invest in non-US equity securities
Creation and Redemption of Shares
The Fund will issue and redeem Shares on a continuous basis at net asset value
(ldquoNAVrdquo)32 only in large blocks of Shares (ldquoCreation Unitsrdquo) in transactions with
authorized participants generally including broker-dealers and large institutional
investors (ldquoAuthorized Participantsrdquo) Creation Units generally will consist of 50000
Shares although this may change from time to time Creation Units however are not
expected to consist of less than 50000 Shares As described in the Registration
Statement and consistent with the Exemptive Relief the Fund will issue and redeem
Creation Units in exchange for an in-kind portfolio of instruments andor cash in lieu of
31 The Commission has stated that long-standing Commission guidelines have required open-end funds to hold no more than 15 of their net assets in illiquid securities and other illiquid assets See Investment Company Act Release No 28193 (March 11 2008) 73 FR 14618 (March 18 2008) footnote 34 See also Investment Company Act Release No 5847 (October 21 1969) 35 FR 19989 (December 31 1970) (Statement Regarding ldquoRestricted Securitiesrdquo) Investment Company Act Release No 18612 (March 12 1992) 57 FR 9828 (March 20 1992) (Revisions of Guidelines to Form N-1A) A fundrsquos portfolio security is illiquid if it cannot be disposed of in the ordinary course of business within seven days at approximately the value ascribed to it by the fund See Investment Company Act Release No 14983 (March 12 1986) 51 FR 9773 (March 21 1986) (adopting amendments to Rule 2a-7 under the 1940 Act) Investment Company Act Release No 17452 (April 23 1990) 55 FR 17933 (April 30 1990) (adopting Rule 144A under the Securities Act of 1933)
32 The NAV of the Fundrsquos Shares generally will be calculated once daily Monday through Friday as of the close of regular trading on the New York Stock Exchange generally 400 pm Eastern Time (the ldquoNAV Calculation Timerdquo) NAV per Share will be calculated by dividing the Fundrsquos net assets by the number of Fund Shares outstanding For more information regarding the valuation of Fund investments in calculating the Fundrsquos NAV see the Registration Statement
SR-NASDAQ-2015-011 Amendment No 2 Page 14 of 64
such instruments (the ldquoCreation Basketrdquo) In addition if there is a difference between the
NAV attributable to a Creation Unit and the market value of the Creation Basket
exchanged for the Creation Unit the party conveying instruments with the lower value
will pay to the other an amount in cash equal to the difference (referred to as the ldquoCash
Componentrdquo)
Creations and redemptions must be made by or through an Authorized Participant
that has executed an agreement that has been agreed to by the Distributor and BNY with
respect to creations and redemptions of Creation Units All standard orders to create
Creation Units must be received by the transfer agent no later than the closing time of the
regular trading session on the New York Stock Exchange (ordinarily 400 pm Eastern
Time) (the ldquoClosing Timerdquo) in each case on the date such order is placed in order for the
creation of Creation Units to be effected based on the NAV of Shares as next determined
on such date after receipt of the order in proper form Shares may be redeemed only in
Creation Units at their NAV next determined after receipt not later than the Closing Time
of a redemption request in proper form by the Fund through the transfer agent and only
on a business day
The Fundrsquos custodian through the National Securities Clearing Corporation will
make available on each business day prior to the opening of business of the Exchange
the list of the names and quantities of the instruments comprising the Creation Basket as
well as the estimated Cash Component (if any) for that day The published Creation
Basket will apply until a new Creation Basket is announced on the following business
day prior to commencement of trading in the Shares
SR-NASDAQ-2015-011 Amendment No 2 Page 15 of 64
Net Asset Value
The Fundrsquos NAV will be determined as of the close of trading (normally
400 pm Eastern Time) on each day the New York Stock Exchange is open for
business NAV will be calculated for the Fund by taking the market price of the Fundrsquos
total assets including interest or dividends accrued but not yet collected less all
liabilities and dividing such amount by the total number of Shares outstanding The
result rounded to the nearest cent will be the NAV per Share All valuations will be
subject to review by the Board of Trustees of the Trust (ldquoTrust Boardrdquo) or its delegate
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with valuation procedures (which may be revised from time to time) adopted by the Trust
Board (the ldquoValuation Proceduresrdquo) and in accordance with the 1940 Act A market
valuation generally means a valuation (i) obtained from an exchange an independent
pricing service (ldquoPricing Servicerdquo) or a major market maker (or dealer) or (ii) based on a
price quotation or other equivalent indication of value supplied by an exchange a Pricing
Service or a major market maker (or dealer) The information summarized below is
based on the Valuation Procedures as currently in effect however as noted above the
Valuation Procedures are amended from time to time and therefore such information is
subject to change
Certain securities including Floating Rate Debt Instruments in which the Fund
may invest will not be listed on any securities exchange or board of trade Such
securities will typically be bought and sold by institutional investors in individually
negotiated private transactions that function in many respects like an over-the-counter
SR-NASDAQ-2015-011 Amendment No 2 Page 16 of 64
secondary market although typically no formal market makers will exist Certain
securities particularly debt securities will have few or no trades or trade infrequently
and information regarding a specific security may not be widely available or may be
incomplete Accordingly determinations of the fair value of debt securities may be
based on infrequent and dated information Because there is less reliable objective data
available elements of judgment may play a greater role in valuation of debt securities
than for other types of securities Typically Floating Rate Debt Instruments and other
debt securities in which the Fund may invest (other than those described below) will be
valued using information provided by a Pricing Service Debt securities having a
remaining maturity of 60 days or less when purchased will be valued at cost adjusted for
amortization of premiums and accretion of discounts provided the Adviserrsquos pricing
committee (the ldquoPricing Committeerdquo) has determined that the use of amortized cost is an
appropriate reflection of fair value given market and issuer-specific conditions existing at
the time of the determination Overnight repurchase agreements will be valued at cost
and term repurchase agreements (ie those whose maturity exceeds seven days) will be
valued at the average of the bid quotations obtained daily from at least two recognized
dealers
Asset-backed and mortgage-backed securities will generally be valued by using a
Pricing Service If a Pricing Service does not cover a particular asset-backed or
mortgage-backed security or discontinues covering a particular asset-backed or
mortgage-backed security the security will be priced using broker quotes generally
provided by brokers that make or participate in markets in the security To derive values
Pricing Services and broker-dealers may use matrix pricing and valuation models as well
SR-NASDAQ-2015-011 Amendment No 2 Page 17 of 64
as recent market transactions for the same or similar assets As it deems appropriate the
Pricing Committee may determine that a Pricing Service price does not represent an
accurate value of an asset-backed or mortgage-backed security based on broker quotes it
receives a recent trade in the security by the Fund information from a portfolio manager
or other market information In the event that the Pricing Committee determines that the
Pricing Service price is unreliable or inaccurate based on such other information broker
quotes may be used Additionally if the Pricing Committee determines that the price of
an asset-backed or mortgage-backed security obtained from a Pricing Service and
available broker quotes is unreliable or inaccurate due to market conditions or other
reasons or if a Pricing Service price or broker quote is unavailable the security will be
valued using fair value pricing as described below
Equity securities listed on any exchange other than the Exchange will be valued at
the last sale price on the exchange on which they are principally traded on the business
day as of which such value is being determined Equity securities listed on the Exchange
will be valued at the official closing price on the business day as of which such value is
being determined If there has been no sale on such day or no official closing price in
the case of securities traded on the Exchange the securities will be valued using fair
value pricing as described below Equity securities traded on more than one securities
exchange will be valued at the last sale price or official closing price as applicable on
the business day as of which such value is being determined at the close of the exchange
representing the principal market for such securities
Exchange-traded options and futures contracts will be valued at the closing price
in the market where such contracts are principally traded
SR-NASDAQ-2015-011 Amendment No 2 Page 18 of 64
Certain securities including Floating Rate Debt Instruments in which the Fund
will invest will not be able to be priced by pre-established pricing methods Such
securities may be valued by the Trust Board or its delegate at fair value The use of fair
value pricing by the Fund will be governed by the Valuation Procedures and conducted in
accordance with the provisions of the 1940 Act Valuing the Fundrsquos securities using fair
value pricing will result in using prices for those securities that may differ from current
market valuations or official closing prices on the applicable exchange
Availability of Information
The Fundrsquos website (wwwftportfolioscom) which will be publicly available
prior to the public offering of Shares will include a form of the prospectus for the Fund
that may be downloaded The website will include the Sharesrsquo ticker CUSIP and
exchange information along with additional quantitative information updated on a daily
basis including for the Fund (1) daily trading volume the prior business dayrsquos reported
NAV and closing price mid-point of the bidask spread at the time of calculation of such
NAV (the ldquoBidAsk Pricerdquo)33 and a calculation of the premium and discount of the
BidAsk Price against the NAV and (2) data in chart format displaying the frequency
distribution of discounts and premiums of the daily BidAsk Price against the NAV
within appropriate ranges for each of the four previous calendar quarters On each
business day before commencement of trading in Shares in the Regular Market Session34
33 The BidAsk Price of the Fund will be determined using the mid-point of the highest bid and the lowest offer on the Exchange as of the time of calculation of the Fundrsquos NAV The records relating to BidAsk Prices will be retained by the Fund and its service providers
34 See Nasdaq Rule 4120(b)(4) (describing the three trading sessions on the Exchange (1) Pre-Market Session from 4 am to 930 am Eastern Time (2)
SR-NASDAQ-2015-011 Amendment No 2 Page 19 of 64
on the Exchange the Fund will disclose on its website the identities and quantities of the
portfolio of securities and other assets (the ldquoDisclosed Portfoliordquo as defined in Nasdaq
Rule 5735(c)(2)) held by the Fund that will form the basis for the Fundrsquos calculation of
NAV at the end of the business day 35 The Fundrsquos disclosure of derivative positions in
the Disclosed Portfolio will include information that market participants can use to value
these positions intraday On a daily basis the Fund will disclose on the Fundrsquos website
the following information regarding each portfolio holding as applicable to the type of
holding ticker symbol CUSIP number or other identifier if any a description of the
holding (including the type of holding) the identity of the security or other asset or
instrument underlying the holding if any for options the option strike price quantity
held (as measured by for example par value notional value or number of shares
contracts or units) maturity date if any coupon rate if any effective date if any market
value of the holding and percentage weighting of the holding in the Fundrsquos portfolio
The website information will be publicly available at no charge
In addition for the Fund an estimated value defined in Rule 5735(c)(3) as the
ldquoIntraday Indicative Valuerdquo that reflects an estimated intraday value of the Fundrsquos
Disclosed Portfolio will be disseminated Moreover the Intraday Indicative Value
Regular Market Session from 930 am to 4 pm or 415 pm Eastern Time and (3) Post-Market Session from 4 pm or 415 pm to 8 pm Eastern Time)
Under accounting procedures to be followed by the Fund trades made on the prior business day (ldquoTrdquo) will be booked and reflected in NAV on the current business day (ldquoT+1rdquo) Accordingly the Fund will be able to disclose at the beginning of the business day the portfolio that will form the basis for the NAV calculation at the end of the business day
35
SR-NASDAQ-2015-011 Amendment No 2 Page 20 of 64
available on the NASDAQ OMX Information LLC proprietary index data service36 will
be based upon the current value for the components of the Disclosed Portfolio and will be
updated and widely disseminated by one or more major market data vendors and broadly
displayed at least every 15 seconds during the Regular Market Session The Intraday
Indicative Value will be based on quotes and closing prices from the securitiesrsquo local
market and may not reflect events that occur subsequent to the local marketrsquos close
Premiums and discounts between the Intraday Indicative Value and the market price may
occur This should not be viewed as a ldquoreal timerdquo update of the NAV per Share of the
Fund which is calculated only once a day
The dissemination of the Intraday Indicative Value together with the Disclosed
Portfolio will allow investors to determine the value of the underlying portfolio of the
Fund on a daily basis and will provide a close estimate of that value throughout the
trading day
Investors will also be able to obtain the Fundrsquos Statement of Additional
Information (ldquoSAIrdquo) the Fundrsquos annual and semi-annual reports (together ldquoShareholder
Reportsrdquo) and its Form N-CSR and Form N-SAR filed twice a year The Fundrsquos SAI
and Shareholder Reports will be available free upon request from the Fund and those
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or
downloaded from the Commissionrsquos website at wwwsecgov Information regarding
market price and trading volume of the Shares will be continually available on a real-time
Currently the NASDAQ OMX Global Index Data Service (ldquoGIDSrdquo) is the NASDAQ OMX global index data feed service offering real-time updates daily summary messages and access to widely followed indexes and Intraday Indicative Values for ETFs GIDS provides investment professionals with the daily information needed to track or trade NASDAQ OMX indexes listed ETFs or third-party partner indexes and ETFs
36
SR-NASDAQ-2015-011 Amendment No 2 Page 21 of 64
basis throughout the day on brokersrsquo computer screens and other electronic services
Information regarding the previous dayrsquos closing price and trading volume information
for the Shares will be published daily in the financial section of newspapers Quotation
and last sale information for the Shares will be available via Nasdaq proprietary quote
and trade services as well as in accordance with the Unlisted Trading Privileges and the
Consolidated Tape Association (ldquoCTArdquo) plans for the Shares Quotation and last sale
information for the other ETFs in which the Fund will invest will be available via the
quote and trade services of their respective primary exchanges as well as in accordance
with the Unlisted Trading Privileges and the CTA plans as applicable Quotation and
last sale information for US exchange-traded options will be available via the Options
Price Reporting Authority Intraday executable price quotations on Floating Rate Debt
Instruments and other assets not traded on an exchange will be available from major
broker-dealer firms or market data vendors as well as from automated quotation systems
published or other public sources or online information services Additionally the Trade
Reporting and Compliance Engine (ldquoTRACErdquo) of the Financial Industry Regulatory
Authority (ldquoFINRArdquo) will be a source of price information for corporate bonds
privately-issued securities mortgage-backed securities and asset-backed securities to the
extent transactions in such securities are reported to TRACE37 For exchange-traded
assets intraday pricing information will be available directly from the applicable listing
exchange
Broker-dealers that are FINRA member firms have an obligation to report transactions in specified debt securities to TRACE to the extent required under applicable FINRA rules Generally such debt securities will have at issuance a maturity that exceeds one calendar year
37
SR-NASDAQ-2015-011 Amendment No 2 Page 22 of 64
Additional information regarding the Fund and the Shares including investment
strategies risks creation and redemption procedures fees Fund holdings disclosure
policies distributions and taxes will be included in the Registration Statement
Initial and Continued Listing
The Shares will be subject to Rule 5735 which sets forth the initial and continued
listing criteria applicable to Managed Fund Shares The Exchange represents that for
initial andor continued listing the Fund must be in compliance with Rule 10A-338 under
the Act A minimum of 100000 Shares will be outstanding at the commencement of
trading on the Exchange The Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the NAV and the
Disclosed Portfolio will be made available to all market participants at the same time
Trading Halts
With respect to trading halts the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading in the Shares of the Fund Nasdaq will
halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12) Trading may be
halted because of market conditions or for reasons that in the view of the Exchange
make trading in the Shares inadvisable These may include (1) the extent to which
trading is not occurring in the securities andor the other assets constituting the Disclosed
Portfolio of the Fund or (2) whether other unusual conditions or circumstances
detrimental to the maintenance of a fair and orderly market are present Trading in the
See 17 CFR 24010A-3 38
SR-NASDAQ-2015-011 Amendment No 2 Page 23 of 64
Shares also will be subject to Rule 5735(d)(2)(D) which sets forth circumstances under
which Shares of the Fund may be halted
Trading Rules
Nasdaq deems the Shares to be equity securities thus rendering trading in the
Shares subject to Nasdaqrsquos existing rules governing the trading of equity securities
Nasdaq will allow trading in the Shares from 400 am until 800 pm Eastern Time
The Exchange has appropriate rules to facilitate transactions in the Shares during all
trading sessions As provided in Nasdaq Rule 5735(b)(3) the minimum price variation
for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $001
Surveillance
The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws39 The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities laws
The surveillances referred to above generally focus on detecting securities trading
outside their normal patterns which could be indicative of manipulative or other violative
activity When such situations are detected surveillance analysis follows and
investigations are opened where appropriate to review the behavior of all relevant
parties for all relevant trading violations
FINRA surveils trading on the Exchange pursuant to a regulatory services agreement The Exchange is responsible for FINRArsquos performance under this regulatory services agreement
39
SR-NASDAQ-2015-011 Amendment No 2 Page 24 of 64
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 25 of 64
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
b Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
SR-NASDAQ-2015-011 Amendment No 2 Page 26 of 64
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
SR-NASDAQ-2015-011 Amendment No 2 Page 27 of 64
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
SR-NASDAQ-2015-011 Amendment No 2 Page 28 of 64
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
SR-NASDAQ-2015-011 Amendment No 2 Page 29 of 64
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
SR-NASDAQ-2015-011 Amendment No 2 Page 30 of 64
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
SR-NASDAQ-2015-011 Amendment No 2 Page 31 of 64
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
4 Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
5 Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received from Members Participants or Others
Written comments were neither solicited nor received
6 Extension of Time Period for Commission Action
The Exchange does not consent at this time to an extension of any time period for
Commission action
7 Basis for Summary Effectiveness Pursuant to Section 19(b)(3) or for Accelerated Effectiveness Pursuant to Section 19(b)(2)
Not applicable
8 Proposed Rule Change Based on Rules of Another Self-Regulatory Organization or of the Commission
Not applicable
9 Security-Based Swap Submissions Filed Pursuant to Section 3C of the Act
Not applicable
SR-NASDAQ-2015-011 Amendment No 2 Page 32 of 64
10 Advance Notices Filed Pursuant to Section 806(e) of the Payment Clearing and Settlement Supervision Act
Not applicable
11 Exhibits
1 Completed notice of proposed rule change for publication in the Federal
Register
SR-NASDAQ-2015-011 Amendment No 2 Page 33 of 64
EXHIBIT 1
SECURITIES AND EXCHANGE COMMISSION (Release No 34shy File No SR-NASDAQ-2015-011)
April __ 2015
Self-Regulatory Organizations The NASDAQ Stock Market LLC Notice of Filing of Proposed Rule Change Relating to the Listing and Trading of the Shares of the First Trust Strategic Floating Rate ETF of First Trust Exchange-Traded Fund IV
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (ldquoActrdquo)1 and
Rule 19b-4 thereunder2 notice is hereby given that on February 12 2015 The NASDAQ
Stock Market LLC (ldquoNasdaqrdquo or the ldquoExchangerdquo) filed with the Securities and Exchange
Commission (ldquoCommissionrdquo) the proposed rule change as described in in Items I II and
III below which Items have been prepared by Nasdaq On April 6 2015 Nasdaq filed
Amendment No 1 which replaced the text of the original filing in its entirety On April
15 2015 Nasdaq filed Amendment No 2 which replaced the text of the original filing in
its entirety The Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons
I Self-Regulatory Organizationrsquos Statement of the Terms of Substance of the Proposed Rule Change
Nasdaq proposes to list and trade the shares of the First Trust Strategic Floating
Rate ETF (the ldquoFundrdquo) of the First Trust Strategic Floating Rate ETF (the ldquoFundrdquo) of
First Trust Exchange-Traded Fund IV (the ldquoTrustrdquo) under Nasdaq Rule 5735 (ldquoManaged
1 15 USC 78s(b)(1)
2 17 CFR 24019b-4
SR-NASDAQ-2015-011 Amendment No 2 Page 34 of 64
Fund Sharesrdquo)3 The shares of the Fund are collectively referred to herein as the
ldquoSharesrdquo
The text of the proposed rule change is available at
httpnasdaqcchwallstreetcom at Nasdaqrsquos principal office and at the Commissionrsquos
Public Reference Room
II Self-Regulatory Organizationrsquos Statement of the Purpose of and Statutory Basis for the Proposed Rule Change
In its filing with the Commission Nasdaq included statements concerning the
purpose of and basis for the proposed rule change The text of these statements may be
examined at the places specified in Item IV below Nasdaq has prepared summaries set
forth in Sections A B and C below of the most significant aspects of such statements
A Self-Regulatory Organizationrsquos Statement of the Purpose of and Statutory Basis for the Proposed Rule Change
1 Purpose
The Exchange proposes to list and trade the Shares of the Fund under Nasdaq
Rule 5735 which governs the listing and trading of Managed Fund Shares4 on the
3 The Commission approved Nasdaq Rule 5735 in Securities Exchange Act Release No 57962 (June 13 2008) 73 FR 35175 (June 20 2008) (SR-NASDAQ-2008shy039) There are already multiple actively-managed funds listed on the Exchange see eg Securities Exchange Act Release Nos 69464 (April 26 2013) 78 FR 25774 (May 2 2013) (SR-NASDAQ-2013-036) (order approving listing and trading of First Trust Senior Loan Fund) 68972 (February 22 2013) 78 FR 13721 (February 28 2013) (SR-NASDAQ-2012-147) (order approving listing and trading of First Trust High Yield LongShort ETF) 66489 (February 29 2012) 77 FR 13379 (March 6 2012) (SR-NASDAQ-2012-004) (order approving listing and trading of WisdomTree Emerging Markets Corporate Bond Fund) The Exchange believes the proposed rule change raises no significant issues not previously addressed in those prior Commission orders
4 A Managed Fund Share is a security that represents an interest in an investment company registered under the Investment Company Act of 1940 (15 USC 80ashy
SR-NASDAQ-2015-011 Amendment No 2 Page 35 of 64
Exchange The Fund will be an actively-managed exchange-traded fund (ldquoETFrdquo) The
Shares will be offered by the Trust which was established as a Massachusetts business
trust on September 15 20105 The Trust is registered with the Commission as an
investment company and has filed a registration statement on Form N-1A (ldquoRegistration
Statementrdquo) with the Commission6 The Fund will be a series of the Trust The Fund
intends to qualify each year as a regulated investment company (ldquoRICrdquo) under
Subchapter M of the Internal Revenue Code of 1986 as amended
First Trust Advisors LP will be the investment adviser (ldquoAdviserrdquo) to the Fund
First Trust Portfolios LP (the ldquoDistributorrdquo) will be the principal underwriter and
distributor of the Fundrsquos Shares The Bank of New York Mellon Corporation (ldquoBNYrdquo)
will act as the administrator accounting agent custodian and transfer agent to the Fund
1) (the ldquo1940 Actrdquo) organized as an open-end investment company or similar entity that invests in a portfolio of securities selected by its investment adviser consistent with its investment objectives and policies In contrast an open-end investment company that issues Index Fund Shares listed and traded on the Exchange under Nasdaq Rule 5705 seeks to provide investment results that correspond generally to the price and yield performance of a specific foreign or domestic stock index fixed income securities index or combination thereof
5 The Commission has issued an order upon which the Trust may rely granting certain exemptive relief under the 1940 Act See Investment Company Act Release No 30029 (April 10 2012) (File No 812-13795) (the ldquoExemptive Reliefrdquo) In addition the Commission has issued no-action relief upon which the Trust may rely pertaining to the Fundrsquos ability to invest in derivatives notwithstanding certain representations in the application for the Exemptive Relief See Commission No-Action Letter (December 6 2012)
6 See Post-Effective Amendment No 104 to Registration Statement on Form N-1A for the Trust dated January 29 2015 (File Nos 333-174332 and 811-22559) The descriptions of the Fund and the Shares contained herein are based in part on information in the Registration Statement
7
SR-NASDAQ-2015-011 Amendment No 2 Page 36 of 64
Paragraph (g) of Rule 5735 provides that if the investment adviser to the
investment company issuing Managed Fund Shares is affiliated with a broker-dealer
such investment adviser shall erect a ldquofire wallrdquo between the investment adviser and the
broker-dealer with respect to access to information concerning the composition andor
changes to such investment company portfolio7 In addition paragraph (g) further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio Rule 5735(g) is similar
to Nasdaq Rule 5705(b)(5)(A)(i) however paragraph (g) in connection with the
establishment of a ldquofire wallrdquo between the investment adviser and the broker-dealer
reflects the applicable open-end fundrsquos portfolio not an underlying benchmark index as
is the case with index-based funds The Adviser is not a broker-dealer although it is
affiliated with the Distributor a broker-dealer The Adviser has implemented a fire wall
An investment adviser to an open-end fund is required to be registered under the Investment Advisers Act of 1940 (the ldquoAdvisers Actrdquo) As a result the Adviser and its related personnel are subject to the provisions of Rule 204A-1 under the Advisers Act relating to codes of ethics This Rule requires investment advisers to adopt a code of ethics that reflects the fiduciary nature of the relationship to clients as well as compliance with other applicable securities laws Accordingly procedures designed to prevent the communication and misuse of non-public information by an investment adviser must be consistent with Rule 204A-1 under the Advisers Act In addition Rule 206(4)-7 under the Advisers Act makes it unlawful for an investment adviser to provide investment advice to clients unless such investment adviser has (i) adopted and implemented written policies and procedures reasonably designed to prevent violation by the investment adviser and its supervised persons of the Advisers Act and the Commission rules adopted thereunder (ii) implemented at a minimum an annual review regarding the adequacy of the policies and procedures established pursuant to subparagraph (i) above and the effectiveness of their implementation and (iii) designated an individual (who is a supervised person) responsible for administering the policies and procedures adopted under subparagraph (i) above
8
SR-NASDAQ-2015-011 Amendment No 2 Page 37 of 64
with respect to its broker-dealer affiliate regarding access to information concerning the
composition andor changes to the portfolio In addition personnel who make decisions
on the Fundrsquos portfolio composition will be subject to procedures designed to prevent the
use and dissemination of material non-public information regarding the Fundrsquos portfolio
In the event (a) the Adviser becomes or becomes newly affiliated with a broker-dealer
or (b) any new adviser or sub-adviser is a registered broker-dealer or becomes affiliated
with another broker-dealer it will implement a fire wall with respect to its relevant
personnel andor such broker-dealer affiliate as applicable regarding access to
information concerning the composition andor changes to the portfolio and will be
subject to procedures designed to prevent the use and dissemination of material
non-public information regarding such portfolio The Fund does not currently intend to
use a sub-adviser
First Trust Strategic Floating Rate ETF
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions8 at least 80 of its
The term ldquounder normal market conditionsrdquo as used herein includes but is not limited to the absence of adverse market economic political or other conditions including extreme volatility or trading halts in the fixed income markets or the financial markets generally operational issues causing dissemination of inaccurate market information or force majeure type events such as systems failure natural or man-made disaster act of God armed conflict act of terrorism riot or labor disruption or any similar intervening circumstance For temporary defensive purposes during the initial invest-up period and during periods of high cash inflows or outflows the Fund may depart from its principal investment strategies for example it may hold a higher than normal proportion of its assets in cash During such periods the Fund may not be able to achieve its investment objective The Fund may adopt a defensive strategy when the Adviser believes securities in which the Fund normally invests have elevated risks due to political or economic factors and in other extraordinary circumstances
SR-NASDAQ-2015-011 Amendment No 2 Page 38 of 64
net assets in a portfolio of the following types of floating-rate9 debt instruments issued by
US and non-US public- and private-sector entities floating-rate corporate10 and
government bonds and notes floating-rate agency securities 11 floating-rate instruments
of non-US issuers floating-rate privately-issued securities 12 floating-rate asset-backed
securities 13 floating-rate mortgage-backed securities14 floating-rate loans 15 and
9 For the avoidance of doubt the term ldquofloating-raterdquo shall also include similar terms such as ldquovariable-raterdquo and ldquoadjustable-raterdquo
10 The Adviser expects that under normal market conditions generally for a corporate bond to be considered as an eligible investment after taking into account such an investment at least 75 of the Fundrsquos net assets that are invested in floating-rate corporate bonds and as described below fixed-rate corporate bonds (in the aggregate) will be comprised of corporate bonds that have at the time of original issuance $100 million or more par amount outstanding
11 ldquoAgency securitiesrdquo for these purposes generally includes securities issued by the following entities Government National Mortgage Association (Ginnie Mae) Federal National Mortgage Association (Fannie Mae) Federal Home Loan Banks (FHLBanks) Federal Home Loan Mortgage Corporation (Freddie Mac) Farm Credit System (FCS) Farm Credit Banks (FCBanks) Student Loan Marketing Association (Sallie Mae) Resolution Funding Corporation (REFCORP) Financing Corporation (FICO) and the Farm Credit System (FCS) Financial Assistance Corporation (FAC) Agency securities can include but are not limited to mortgage-backed securities
12 ldquoPrivately-issued securitiesrdquo for these purposes generally includes Rule 144A securities other than mortgage-backed Rule 144A securities Under normal market conditions privately-issued securities will have at the time of original issuance $100 million or more principal amount outstanding to be considered eligible investments
13 Asset-backed securities are securities that are backed by a pool of assets The Fund currently intends to invest in asset-backed securities that are consumer asset-backed securities
14 Mortgage-backed securities which are securities that directly or indirectly represent a participation in or are secured by and payable from mortgage loans on real property will consist of (1) residential mortgage-backed securities (ldquoRMBSrdquo) (2) commercial mortgage-backed securities (ldquoCMBSrdquo) (3) stripped mortgage-backed securities (ldquoSMBSrdquo) which are mortgage-backed securities
SR-NASDAQ-2015-011 Amendment No 2 Page 39 of 64
investment companies16 (including investment companies advised by the Adviser) that
invest primarily in the foregoing types of debt instruments17 (collectively ldquoFloating Rate
Debt Instrumentsrdquo)
where mortgage payments are divided between paying the loanrsquos principal and paying the loanrsquos interest (4) collateralized mortgage obligations (ldquoCMOsrdquo) and real estate mortgage investment conduits (ldquoREMICsrdquo) which are mortgage-backed securities that are divided into multiple classes with each class being entitled to a different share of the principal and interest payments received from the pool of underlying assets
15 The floating-rate loans in which the Fund will invest will represent amounts borrowed by companies or other entities from banks and other lenders and a significant portion of such floating-rate loans may be rated below investment grade or unrated Floating-rate loans held by the Fund may be senior or subordinate obligations of the borrower and may or may not be secured by collateral First lien senior secured floating-rate loans are referred to herein as ldquosenior loansrdquo Floating-rate loans that are not senior loans (ie unsecured floating-rate loans and secured floating-rate loans that are not first lien floating-rate loans) are referred to herein as ldquojunior loansrdquo The Fund will generally invest in floating-rate loans that the Adviser deems to be liquid with readily available prices notwithstanding the foregoing the Fund may invest in floating-rate loans that are deemed illiquid so long as the Fund complies with the 15 limitation on investments of its net assets in illiquid assets described below under ldquoInvestment Restrictionsrdquo
16 The Fund currently anticipates investing only in registered open-end investment companies that are listed and traded in the US on registered exchanges (ie other ETFs) An ETF is an investment company registered under the 1940 Act that holds a portfolio of securities Many ETFs are designed to track the performance of a securities index including industry sector country and region indexes The Fund may invest in the securities of ETFs in excess of the limits imposed under the 1940 Act pursuant to exemptive orders obtained by other ETFs and their sponsors from the Commission In addition the Fund may invest in the securities of certain investment companies in excess of the limits imposed under the 1940 Act pursuant to an exemptive order obtained by the Trust and the Adviser from the Commission See Investment Company Act Release No 30377 (February 5 2013) (File No 812-13895) The ETFs in which the Fund may invest include Index Fund Shares (as described in Nasdaq Rule 5705) Portfolio Depository Receipts (as described in Nasdaq Rule 5705) and Managed Fund Shares (as described in Nasdaq Rule 5735) While the Fund may invest in inverse ETFs the Fund will not invest in leveraged or inverse leveraged (eg 2X or -3X) ETFs
SR-NASDAQ-2015-011 Amendment No 2 Page 40 of 64
At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade To be considered
ldquoinvestment graderdquo under normal market conditions rated Floating Rate Debt
Instruments will carry at the time of purchase a rating in the highest four rating
categories of at least one nationally recognized statistical ratings organization
(ldquoNRSROrdquo) (eg BBB- or higher by Standard amp Poorrsquos Ratings Services (ldquoSampPrdquo)
andor Fitch Ratings (ldquoFitchrdquo) or Baa3 or higher by Moodyrsquos Investors Service Inc
(ldquoMoodyrsquosrdquo)18 For unrated securities to be considered ldquoinvestment graderdquo under normal
market conditions such securities will be determined at the time of purchase to be of
comparable quality19 by the Adviser The Fund may invest up to 35 of its net assets in
securities that are at the time of investment rated below investment grade by each
NRSRO rating such securities (or securities that are unrated and determined by the
17 The liquidity of a security especially in the case of asset-backed and mortgage-backed securities will be a substantial factor in the Fundrsquos security selection process Consistent with the discussion below under ldquoInvestment Restrictionsrdquo the Fund will not purchase any Floating Rate Debt Instruments (including asset-backed securities and mortgage-backed securities) that in the Adviserrsquos opinion are illiquid if as a result more than 15 of the value of the Fundrsquos net assets will be invested in illiquid assets
18 For the avoidance of doubt if a security is rated by multiple NRSROs and receives different ratings the Fund will treat the security as being rated in the highest rating category received from an NRSRO
19 Comparable quality of unrated securities will be determined by the Adviser based on fundamental credit analysis of the unrated security and comparable NRSRO-rated securities On a best efforts basis the Adviser will attempt to make a rating determination based on publicly available data In making a ldquocomparable qualityrdquo determination the Adviser may consider for example whether the issuer of the security has issued other rated securities the nature and provisions of the relevant security whether the obligations under the relevant security are guaranteed by another entity and the rating of such guarantor (if any) relevant cash flows macroeconomic analysis andor sector or industry analysis
SR-NASDAQ-2015-011 Amendment No 2 Page 41 of 64
Adviser to be of comparable quality) commonly referred to as ldquohigh yieldrdquo or ldquojunkrdquo
bonds If subsequent to purchase by the Fund a security held by the Fund experiences a
decline in credit quality and falls below investment grade the Fund may continue to hold
the security and it will not cause the Fund to violate the 35 investment limitation
however the security will be taken into account for purposes of determining whether
purchases of additional securities will cause the Fund to violate such limitation
The Fund will limit its investments in asset-backed securities (excluding agency
mortgage-backed securities) and non-agency mortgage-backed securities (in the
aggregate) to 20 of its net assets20 In addition the Fund will limit its investments in
junior loans to 20 of its net assets
The Fund will hold debt securities (including in the aggregate Floating Rate
Debt Instruments and the fixed-rate debt securities described below) of at least 13
non-affiliated issuers
Other Investments
Under normal market conditions the Fund will invest primarily in the Floating
Rate Debt Instruments described above to meet its investment objective In addition the
Fund may invest up to 20 of its net assets in the following types of fixed-rate debt
securities corporate21 and government bonds and notes agency securities22 instruments
20 For the avoidance of doubt there is no limitation on the Fundrsquos investments in agency mortgage-backed securities
21 See footnote 10 above
22 See footnote 11 above
SR-NASDAQ-2015-011 Amendment No 2 Page 42 of 64
of non-US issuers in developed markets privately-issued securities 23 asset-backed
securities 24 mortgage-backed securities 25 municipal bonds money market securities26
and investment companies27 (including investment companies advised by the Adviser)
that invest primarily in the foregoing types of debt securities
Further to pursue its investment objective the Fund may invest up to 20 of the
value of its net assets in exchange-listed options on US Treasury futures contracts and
exchange-listed US Treasury futures contracts28 The use of these derivative
transactions may allow the Fund to obtain net long or short exposures to selected interest
rates These derivatives may also be used to hedge risks including interest rate risks and
credit risks associated with the Fundrsquos portfolio investments The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
23 See footnote 12 above
24 See footnote 13 above
25 See footnote 14 above
26 ldquoMoney market securitiesrdquo for these purposes generally includes short-term high-quality obligations issued or guaranteed by the US Treasury or the agencies or instrumentalities of the US government short-term high-quality securities issued or guaranteed by non-US governments agencies and instrumentalities repurchase agreements commercial paper (both asset-backed and non-assetshybacked) and deposits and other obligations of US and non-US banks and financial institutions
27 See footnote 16 above
28 At least 90 of the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be invested in instruments that trade in markets that are members of the Intermarket Surveillance Group (ldquoISGrdquo) (see footnote 40 below) or are parties to a comprehensive surveillance sharing agreement with the Exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 43 of 64
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index
Investment Restrictions
The Fund will not invest 25 or more of the value of its total assets in securities
of issuers in any one industry This restriction does not apply to (a) obligations issued or
guaranteed by the US government its agencies or instrumentalities or (b) securities of
other investment companies29
The Fund may hold up to an aggregate amount of 15 of its net assets in illiquid
assets (calculated at the time of investment) including Rule 144A securities deemed
illiquid by the Adviser30 The Fund will monitor its portfolio liquidity on an ongoing
basis to determine whether in light of current circumstances an adequate level of
liquidity is being maintained and will consider taking appropriate steps in order to
maintain adequate liquidity if through a change in values net assets or other
circumstances more than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid
assets include securities subject to contractual or other restrictions on resale and other
29 See Form N-1A Item 9 The Commission has taken the position that a fund is concentrated if it invests more than 25 of the value of its total assets in any one industry See eg Investment Company Act Release No 9011 (October 30 1975) 40 FR 54241 (November 21 1975)
30 In reaching liquidity decisions the Adviser may consider the following factors the frequency of trades and quotes for the security the number of dealers wishing to purchase or sell the security and the number of other potential purchasers dealer undertakings to make a market in the security and the nature of the security and the nature of the marketplace in which it trades (eg the time needed to dispose of the security the method of soliciting offers and the mechanics of transfer)
SR-NASDAQ-2015-011 Amendment No 2 Page 44 of 64
instruments that lack readily available markets as determined in accordance with
Commission staff guidance31
The Fund will not invest in non-US equity securities
Creation and Redemption of Shares
The Fund will issue and redeem Shares on a continuous basis at net asset value
(ldquoNAVrdquo)32 only in large blocks of Shares (ldquoCreation Unitsrdquo) in transactions with
authorized participants generally including broker-dealers and large institutional
investors (ldquoAuthorized Participantsrdquo) Creation Units generally will consist of 50000
Shares although this may change from time to time Creation Units however are not
expected to consist of less than 50000 Shares As described in the Registration
Statement and consistent with the Exemptive Relief the Fund will issue and redeem
Creation Units in exchange for an in-kind portfolio of instruments andor cash in lieu of
31 The Commission has stated that long-standing Commission guidelines have required open-end funds to hold no more than 15 of their net assets in illiquid securities and other illiquid assets See Investment Company Act Release No 28193 (March 11 2008) 73 FR 14618 (March 18 2008) footnote 34 See also Investment Company Act Release No 5847 (October 21 1969) 35 FR 19989 (December 31 1970) (Statement Regarding ldquoRestricted Securitiesrdquo) Investment Company Act Release No 18612 (March 12 1992) 57 FR 9828 (March 20 1992) (Revisions of Guidelines to Form N-1A) A fundrsquos portfolio security is illiquid if it cannot be disposed of in the ordinary course of business within seven days at approximately the value ascribed to it by the fund See Investment Company Act Release No 14983 (March 12 1986) 51 FR 9773 (March 21 1986) (adopting amendments to Rule 2a-7 under the 1940 Act) Investment Company Act Release No 17452 (April 23 1990) 55 FR 17933 (April 30 1990) (adopting Rule 144A under the Securities Act of 1933)
32 The NAV of the Fundrsquos Shares generally will be calculated once daily Monday through Friday as of the close of regular trading on the New York Stock Exchange generally 400 pm Eastern Time (the ldquoNAV Calculation Timerdquo) NAV per Share will be calculated by dividing the Fundrsquos net assets by the number of Fund Shares outstanding For more information regarding the valuation of Fund investments in calculating the Fundrsquos NAV see the Registration Statement
SR-NASDAQ-2015-011 Amendment No 2 Page 45 of 64
such instruments (the ldquoCreation Basketrdquo) In addition if there is a difference between the
NAV attributable to a Creation Unit and the market value of the Creation Basket
exchanged for the Creation Unit the party conveying instruments with the lower value
will pay to the other an amount in cash equal to the difference (referred to as the ldquoCash
Componentrdquo)
Creations and redemptions must be made by or through an Authorized Participant
that has executed an agreement that has been agreed to by the Distributor and BNY with
respect to creations and redemptions of Creation Units All standard orders to create
Creation Units must be received by the transfer agent no later than the closing time of the
regular trading session on the New York Stock Exchange (ordinarily 400 pm Eastern
Time) (the ldquoClosing Timerdquo) in each case on the date such order is placed in order for the
creation of Creation Units to be effected based on the NAV of Shares as next determined
on such date after receipt of the order in proper form Shares may be redeemed only in
Creation Units at their NAV next determined after receipt not later than the Closing Time
of a redemption request in proper form by the Fund through the transfer agent and only
on a business day
The Fundrsquos custodian through the National Securities Clearing Corporation will
make available on each business day prior to the opening of business of the Exchange
the list of the names and quantities of the instruments comprising the Creation Basket as
well as the estimated Cash Component (if any) for that day The published Creation
Basket will apply until a new Creation Basket is announced on the following business
day prior to commencement of trading in the Shares
SR-NASDAQ-2015-011 Amendment No 2 Page 46 of 64
Net Asset Value
The Fundrsquos NAV will be determined as of the close of trading (normally
400 pm Eastern Time) on each day the New York Stock Exchange is open for
business NAV will be calculated for the Fund by taking the market price of the Fundrsquos
total assets including interest or dividends accrued but not yet collected less all
liabilities and dividing such amount by the total number of Shares outstanding The
result rounded to the nearest cent will be the NAV per Share All valuations will be
subject to review by the Board of Trustees of the Trust (ldquoTrust Boardrdquo) or its delegate
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with valuation procedures (which may be revised from time to time) adopted by the Trust
Board (the ldquoValuation Proceduresrdquo) and in accordance with the 1940 Act A market
valuation generally means a valuation (i) obtained from an exchange an independent
pricing service (ldquoPricing Servicerdquo) or a major market maker (or dealer) or (ii) based on a
price quotation or other equivalent indication of value supplied by an exchange a Pricing
Service or a major market maker (or dealer) The information summarized below is
based on the Valuation Procedures as currently in effect however as noted above the
Valuation Procedures are amended from time to time and therefore such information is
subject to change
Certain securities including Floating Rate Debt Instruments in which the Fund
may invest will not be listed on any securities exchange or board of trade Such
securities will typically be bought and sold by institutional investors in individually
negotiated private transactions that function in many respects like an over-the-counter
SR-NASDAQ-2015-011 Amendment No 2 Page 47 of 64
secondary market although typically no formal market makers will exist Certain
securities particularly debt securities will have few or no trades or trade infrequently
and information regarding a specific security may not be widely available or may be
incomplete Accordingly determinations of the fair value of debt securities may be
based on infrequent and dated information Because there is less reliable objective data
available elements of judgment may play a greater role in valuation of debt securities
than for other types of securities Typically Floating Rate Debt Instruments and other
debt securities in which the Fund may invest (other than those described below) will be
valued using information provided by a Pricing Service Debt securities having a
remaining maturity of 60 days or less when purchased will be valued at cost adjusted for
amortization of premiums and accretion of discounts provided the Adviserrsquos pricing
committee (the ldquoPricing Committeerdquo) has determined that the use of amortized cost is an
appropriate reflection of fair value given market and issuer-specific conditions existing at
the time of the determination Overnight repurchase agreements will be valued at cost
and term repurchase agreements (ie those whose maturity exceeds seven days) will be
valued at the average of the bid quotations obtained daily from at least two recognized
dealers
Asset-backed and mortgage-backed securities will generally be valued by using a
Pricing Service If a Pricing Service does not cover a particular asset-backed or
mortgage-backed security or discontinues covering a particular asset-backed or
mortgage-backed security the security will be priced using broker quotes generally
provided by brokers that make or participate in markets in the security To derive values
Pricing Services and broker-dealers may use matrix pricing and valuation models as well
SR-NASDAQ-2015-011 Amendment No 2 Page 48 of 64
as recent market transactions for the same or similar assets As it deems appropriate the
Pricing Committee may determine that a Pricing Service price does not represent an
accurate value of an asset-backed or mortgage-backed security based on broker quotes it
receives a recent trade in the security by the Fund information from a portfolio manager
or other market information In the event that the Pricing Committee determines that the
Pricing Service price is unreliable or inaccurate based on such other information broker
quotes may be used Additionally if the Pricing Committee determines that the price of
an asset-backed or mortgage-backed security obtained from a Pricing Service and
available broker quotes is unreliable or inaccurate due to market conditions or other
reasons or if a Pricing Service price or broker quote is unavailable the security will be
valued using fair value pricing as described below
Equity securities listed on any exchange other than the Exchange will be valued at
the last sale price on the exchange on which they are principally traded on the business
day as of which such value is being determined Equity securities listed on the Exchange
will be valued at the official closing price on the business day as of which such value is
being determined If there has been no sale on such day or no official closing price in
the case of securities traded on the Exchange the securities will be valued using fair
value pricing as described below Equity securities traded on more than one securities
exchange will be valued at the last sale price or official closing price as applicable on
the business day as of which such value is being determined at the close of the exchange
representing the principal market for such securities
Exchange-traded options and futures contracts will be valued at the closing price
in the market where such contracts are principally traded
SR-NASDAQ-2015-011 Amendment No 2 Page 49 of 64
Certain securities including Floating Rate Debt Instruments in which the Fund
will invest will not be able to be priced by pre-established pricing methods Such
securities may be valued by the Trust Board or its delegate at fair value The use of fair
value pricing by the Fund will be governed by the Valuation Procedures and conducted in
accordance with the provisions of the 1940 Act Valuing the Fundrsquos securities using fair
value pricing will result in using prices for those securities that may differ from current
market valuations or official closing prices on the applicable exchange
Availability of Information
The Fundrsquos website (wwwftportfolioscom) which will be publicly available
prior to the public offering of Shares will include a form of the prospectus for the Fund
that may be downloaded The website will include the Sharesrsquo ticker CUSIP and
exchange information along with additional quantitative information updated on a daily
basis including for the Fund (1) daily trading volume the prior business dayrsquos reported
NAV and closing price mid-point of the bidask spread at the time of calculation of such
NAV (the ldquoBidAsk Pricerdquo)33 and a calculation of the premium and discount of the
BidAsk Price against the NAV and (2) data in chart format displaying the frequency
distribution of discounts and premiums of the daily BidAsk Price against the NAV
within appropriate ranges for each of the four previous calendar quarters On each
business day before commencement of trading in Shares in the Regular Market Session34
33 The BidAsk Price of the Fund will be determined using the mid-point of the highest bid and the lowest offer on the Exchange as of the time of calculation of the Fundrsquos NAV The records relating to BidAsk Prices will be retained by the Fund and its service providers
34 See Nasdaq Rule 4120(b)(4) (describing the three trading sessions on the Exchange (1) Pre-Market Session from 4 am to 930 am Eastern Time (2)
SR-NASDAQ-2015-011 Amendment No 2 Page 50 of 64
on the Exchange the Fund will disclose on its website the identities and quantities of the
portfolio of securities and other assets (the ldquoDisclosed Portfoliordquo as defined in Nasdaq
Rule 5735(c)(2)) held by the Fund that will form the basis for the Fundrsquos calculation of
NAV at the end of the business day 35 The Fundrsquos disclosure of derivative positions in
the Disclosed Portfolio will include information that market participants can use to value
these positions intraday On a daily basis the Fund will disclose on the Fundrsquos website
the following information regarding each portfolio holding as applicable to the type of
holding ticker symbol CUSIP number or other identifier if any a description of the
holding (including the type of holding) the identity of the security or other asset or
instrument underlying the holding if any for options the option strike price quantity
held (as measured by for example par value notional value or number of shares
contracts or units) maturity date if any coupon rate if any effective date if any market
value of the holding and percentage weighting of the holding in the Fundrsquos portfolio
The website information will be publicly available at no charge
In addition for the Fund an estimated value defined in Rule 5735(c)(3) as the
ldquoIntraday Indicative Valuerdquo that reflects an estimated intraday value of the Fundrsquos
Disclosed Portfolio will be disseminated Moreover the Intraday Indicative Value
Regular Market Session from 930 am to 4 pm or 415 pm Eastern Time and (3) Post-Market Session from 4 pm or 415 pm to 8 pm Eastern Time)
Under accounting procedures to be followed by the Fund trades made on the prior business day (ldquoTrdquo) will be booked and reflected in NAV on the current business day (ldquoT+1rdquo) Accordingly the Fund will be able to disclose at the beginning of the business day the portfolio that will form the basis for the NAV calculation at the end of the business day
35
SR-NASDAQ-2015-011 Amendment No 2 Page 51 of 64
available on the NASDAQ OMX Information LLC proprietary index data service36 will
be based upon the current value for the components of the Disclosed Portfolio and will be
updated and widely disseminated by one or more major market data vendors and broadly
displayed at least every 15 seconds during the Regular Market Session The Intraday
Indicative Value will be based on quotes and closing prices from the securitiesrsquo local
market and may not reflect events that occur subsequent to the local marketrsquos close
Premiums and discounts between the Intraday Indicative Value and the market price may
occur This should not be viewed as a ldquoreal timerdquo update of the NAV per Share of the
Fund which is calculated only once a day
The dissemination of the Intraday Indicative Value together with the Disclosed
Portfolio will allow investors to determine the value of the underlying portfolio of the
Fund on a daily basis and will provide a close estimate of that value throughout the
trading day
Investors will also be able to obtain the Fundrsquos Statement of Additional
Information (ldquoSAIrdquo) the Fundrsquos annual and semi-annual reports (together ldquoShareholder
Reportsrdquo) and its Form N-CSR and Form N-SAR filed twice a year The Fundrsquos SAI
and Shareholder Reports will be available free upon request from the Fund and those
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or
downloaded from the Commissionrsquos website at wwwsecgov Information regarding
Currently the NASDAQ OMX Global Index Data Service (ldquoGIDSrdquo) is the NASDAQ OMX global index data feed service offering real-time updates daily summary messages and access to widely followed indexes and Intraday Indicative Values for ETFs GIDS provides investment professionals with the daily information needed to track or trade NASDAQ OMX indexes listed ETFs or third-party partner indexes and ETFs
36
SR-NASDAQ-2015-011 Amendment No 2 Page 52 of 64
market price and trading volume of the Shares will be continually available on a real-time
basis throughout the day on brokersrsquo computer screens and other electronic services
Information regarding the previous dayrsquos closing price and trading volume information
for the Shares will be published daily in the financial section of newspapers Quotation
and last sale information for the Shares will be available via Nasdaq proprietary quote
and trade services as well as in accordance with the Unlisted Trading Privileges and the
Consolidated Tape Association (ldquoCTArdquo) plans for the Shares Quotation and last sale
information for the other ETFs in which the Fund will invest will be available via the
quote and trade services of their respective primary exchanges as well as in accordance
with the Unlisted Trading Privileges and the CTA plans as applicable Quotation and
last sale information for US exchange-traded options will be available via the Options
Price Reporting Authority Intraday executable price quotations on Floating Rate Debt
Instruments and other assets not traded on an exchange will be available from major
broker-dealer firms or market data vendors as well as from automated quotation systems
published or other public sources or online information services Additionally the Trade
Reporting and Compliance Engine (ldquoTRACErdquo) of the Financial Industry Regulatory
Authority (ldquoFINRArdquo) will be a source of price information for corporate bonds
privately-issued securities mortgage-backed securities and asset-backed securities to the
extent transactions in such securities are reported to TRACE37 For exchange-traded
Broker-dealers that are FINRA member firms have an obligation to report transactions in specified debt securities to TRACE to the extent required under applicable FINRA rules Generally such debt securities will have at issuance a maturity that exceeds one calendar year
37
SR-NASDAQ-2015-011 Amendment No 2 Page 53 of 64
assets intraday pricing information will be available directly from the applicable listing
exchange
Additional information regarding the Fund and the Shares including investment
strategies risks creation and redemption procedures fees Fund holdings disclosure
policies distributions and taxes will be included in the Registration Statement
Initial and Continued Listing
The Shares will be subject to Rule 5735 which sets forth the initial and continued
listing criteria applicable to Managed Fund Shares The Exchange represents that for
initial andor continued listing the Fund must be in compliance with Rule 10A-338 under
the Act A minimum of 100000 Shares will be outstanding at the commencement of
trading on the Exchange The Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the NAV and the
Disclosed Portfolio will be made available to all market participants at the same time
Trading Halts
With respect to trading halts the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading in the Shares of the Fund Nasdaq will
halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12) Trading may be
halted because of market conditions or for reasons that in the view of the Exchange
make trading in the Shares inadvisable These may include (1) the extent to which
trading is not occurring in the securities andor the other assets constituting the Disclosed
Portfolio of the Fund or (2) whether other unusual conditions or circumstances
See 17 CFR 24010A-3 38
SR-NASDAQ-2015-011 Amendment No 2 Page 54 of 64
detrimental to the maintenance of a fair and orderly market are present Trading in the
Shares also will be subject to Rule 5735(d)(2)(D) which sets forth circumstances under
which Shares of the Fund may be halted
Trading Rules
Nasdaq deems the Shares to be equity securities thus rendering trading in the
Shares subject to Nasdaqrsquos existing rules governing the trading of equity securities
Nasdaq will allow trading in the Shares from 400 am until 800 pm Eastern Time
The Exchange has appropriate rules to facilitate transactions in the Shares during all
trading sessions As provided in Nasdaq Rule 5735(b)(3) the minimum price variation
for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $001
Surveillance
The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws39 The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities laws
The surveillances referred to above generally focus on detecting securities trading
outside their normal patterns which could be indicative of manipulative or other violative
activity When such situations are detected surveillance analysis follows and
FINRA surveils trading on the Exchange pursuant to a regulatory services agreement The Exchange is responsible for FINRArsquos performance under this regulatory services agreement
39
SR-NASDAQ-2015-011 Amendment No 2 Page 55 of 64
investigations are opened where appropriate to review the behavior of all relevant
parties for all relevant trading violations
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 56 of 64
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
SR-NASDAQ-2015-011 Amendment No 2 Page 57 of 64
2 Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
SR-NASDAQ-2015-011 Amendment No 2 Page 58 of 64
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
SR-NASDAQ-2015-011 Amendment No 2 Page 59 of 64
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
SR-NASDAQ-2015-011 Amendment No 2 Page 60 of 64
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 61 of 64
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
SR-NASDAQ-2015-011 Amendment No 2 Page 62 of 64
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
B Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
C Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received From Members Participants or Others
Written comments were neither solicited nor received
III Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Within 45 days of the date of publication of this notice in the Federal Register or
within such longer period (i) as the Commission may designate up to 90 days of such date
if it finds such longer period to be appropriate and publishes its reasons for so finding or
(ii) as to which the Exchange consents the Commission shall (a) by order approve or
disapprove such proposed rule change or (b) institute proceedings to determine whether
the proposed rule change should be disapproved
SR-NASDAQ-2015-011 Amendment No 2 Page 63 of 64
IV Solicitation of Comments
Interested persons are invited to submit written data views and arguments
concerning the foregoing including whether the proposed rule change is consistent with
the Act Comments may be submitted by any of the following methods
Electronic comments
bull Use the Commissionrsquos Internet comment form
(httpwwwsecgovrulessroshtml) or
bull Send an e-mail to rule-commentssecgov Please include File Number
SR-NASDAQ-2015-011 on the subject line
Paper comments
bull Send paper comments in triplicate to Brent J Fields Secretary Securities and
Exchange Commission Station Place 100 F Street NE Washington DC
20549-9303
All submissions should refer to File Number SR-NASDAQ-2015-011 This file number
should be included on the subject line if e-mail is used To help the Commission process
and review your comments more efficiently please use only one method The
Commission will post all comments on the Commissionrsquos Internet website
httpwwwsecgovrulessroshtml
Copies of the submission all subsequent amendments all written statements with
respect to the proposed rule change that are filed with the Commission and all written
communications relating to the proposed rule change between the Commission and any
person other than those that may be withheld from the public in accordance with the
provisions of 5 USC 552 will be available for website viewing and printing in the
Commissionrsquos Public Reference Room 100 F Street NE Washington DC 20549 on
SR-NASDAQ-2015-011 Amendment No 2 Page 64 of 64
official business days between the hours of 1000 am and 300 pm Copies of the filing
also will be available for inspection and copying at the principal office of Nasdaq All
comments received will be posted without change the Commission does not edit
personal identifying information from submissions You should submit only information
that you wish to make available publicly
All submissions should refer to File Number SR-NASDAQ-2015-011 and should
be submitted on or before [insert date 21 days from publication in the Federal Register]
For the Commission by the Division of Trading and Markets pursuant to
delegated authority41
Kevin M OrsquoNeill Deputy Secretary
17 CFR 20030-3(a)(12) 41
SR-NASDAQ-2015-011 Amendment No 2 Page 4 of 64
Questions regarding this rule filing may be directed to Jonathan F Cayne Senior
Associate General Counsel The NASDAQ OMX Group at (301) 978-8493 (telephone)
3 Self-Regulatory Organizationrsquos Statement of the Purpose of and Statutory Basis for the Proposed Rule Change
a Purpose
The Exchange proposes to list and trade the Shares of the Fund under Nasdaq
Rule 5735 which governs the listing and trading of Managed Fund Shares4 on the
Exchange The Fund will be an actively-managed exchange-traded fund (ldquoETFrdquo) The
Shares will be offered by the Trust which was established as a Massachusetts business
trust on September 15 20105 The Trust is registered with the Commission as an
investment company and has filed a registration statement on Form N-1A (ldquoRegistration
Statementrdquo) with the Commission 6 The Fund will be a series of the Trust The Fund
4 A Managed Fund Share is a security that represents an interest in an investment company registered under the Investment Company Act of 1940 (15 USC 80ashy1) (the ldquo1940 Actrdquo) organized as an open-end investment company or similar entity that invests in a portfolio of securities selected by its investment adviser consistent with its investment objectives and policies In contrast an open-end investment company that issues Index Fund Shares listed and traded on the Exchange under Nasdaq Rule 5705 seeks to provide investment results that correspond generally to the price and yield performance of a specific foreign or domestic stock index fixed income securities index or combination thereof
5 The Commission has issued an order upon which the Trust may rely granting certain exemptive relief under the 1940 Act See Investment Company Act Release No 30029 (April 10 2012) (File No 812-13795) (the ldquoExemptive Reliefrdquo) In addition the Commission has issued no-action relief upon which the Trust may rely pertaining to the Fundrsquos ability to invest in derivatives notwithstanding certain representations in the application for the Exemptive Relief See Commission No-Action Letter (December 6 2012)
6 See Post-Effective Amendment No 104 to Registration Statement on Form N-1A for the Trust dated January 29 2015 (File Nos 333-174332 and 811-22559) The descriptions of the Fund and the Shares contained herein are based in part on information in the Registration Statement
7
SR-NASDAQ-2015-011 Amendment No 2 Page 5 of 64
intends to qualify each year as a regulated investment company (ldquoRICrdquo) under
Subchapter M of the Internal Revenue Code of 1986 as amended
First Trust Advisors LP will be the investment adviser (ldquoAdviserrdquo) to the Fund
First Trust Portfolios LP (the ldquoDistributorrdquo) will be the principal underwriter and
distributor of the Fundrsquos Shares The Bank of New York Mellon Corporation (ldquoBNYrdquo)
will act as the administrator accounting agent custodian and transfer agent to the Fund
Paragraph (g) of Rule 5735 provides that if the investment adviser to the
investment company issuing Managed Fund Shares is affiliated with a broker-dealer
such investment adviser shall erect a ldquofire wallrdquo between the investment adviser and the
broker-dealer with respect to access to information concerning the composition andor
changes to such investment company portfolio7 In addition paragraph (g) further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio Rule 5735(g) is similar
An investment adviser to an open-end fund is required to be registered under the Investment Advisers Act of 1940 (the ldquoAdvisers Actrdquo) As a result the Adviser and its related personnel are subject to the provisions of Rule 204A-1 under the Advisers Act relating to codes of ethics This Rule requires investment advisers to adopt a code of ethics that reflects the fiduciary nature of the relationship to clients as well as compliance with other applicable securities laws Accordingly procedures designed to prevent the communication and misuse of non-public information by an investment adviser must be consistent with Rule 204A-1 under the Advisers Act In addition Rule 206(4)-7 under the Advisers Act makes it unlawful for an investment adviser to provide investment advice to clients unless such investment adviser has (i) adopted and implemented written policies and procedures reasonably designed to prevent violation by the investment adviser and its supervised persons of the Advisers Act and the Commission rules adopted thereunder (ii) implemented at a minimum an annual review regarding the adequacy of the policies and procedures established pursuant to subparagraph (i) above and the effectiveness of their implementation and (iii) designated an individual (who is a supervised person) responsible for administering the policies and procedures adopted under subparagraph (i) above
SR-NASDAQ-2015-011 Amendment No 2 Page 6 of 64
to Nasdaq Rule 5705(b)(5)(A)(i) however paragraph (g) in connection with the
establishment of a ldquofire wallrdquo between the investment adviser and the broker-dealer
reflects the applicable open-end fundrsquos portfolio not an underlying benchmark index as
is the case with index-based funds The Adviser is not a broker-dealer although it is
affiliated with the Distributor a broker-dealer The Adviser has implemented a fire wall
with respect to its broker-dealer affiliate regarding access to information concerning the
composition andor changes to the portfolio In addition personnel who make decisions
on the Fundrsquos portfolio composition will be subject to procedures designed to prevent the
use and dissemination of material non-public information regarding the Fundrsquos portfolio
In the event (a) the Adviser becomes or becomes newly affiliated with a broker-dealer
or (b) any new adviser or sub-adviser is a registered broker-dealer or becomes affiliated
with another broker-dealer it will implement a fire wall with respect to its relevant
personnel andor such broker-dealer affiliate as applicable regarding access to
information concerning the composition andor changes to the portfolio and will be
subject to procedures designed to prevent the use and dissemination of material
non-public information regarding such portfolio The Fund does not currently intend to
use a sub-adviser
First Trust Strategic Floating Rate ETF
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions8 at least 80 of its
The term ldquounder normal market conditionsrdquo as used herein includes but is not limited to the absence of adverse market economic political or other conditions including extreme volatility or trading halts in the fixed income markets or the financial markets generally operational issues causing dissemination of inaccurate market information or force majeure type events such as systems
8
SR-NASDAQ-2015-011 Amendment No 2 Page 7 of 64
net assets in a portfolio of the following types of floating-rate9 debt instruments issued by
US and non-US public- and private-sector entities floating-rate corporate10 and
government bonds and notes floating-rate agency securities 11 floating-rate instruments
of non-US issuers floating-rate privately-issued securities 12 floating-rate asset-backed
failure natural or man-made disaster act of God armed conflict act of terrorism riot or labor disruption or any similar intervening circumstance For temporary defensive purposes during the initial invest-up period and during periods of high cash inflows or outflows the Fund may depart from its principal investment strategies for example it may hold a higher than normal proportion of its assets in cash During such periods the Fund may not be able to achieve its investment objective The Fund may adopt a defensive strategy when the Adviser believes securities in which the Fund normally invests have elevated risks due to political or economic factors and in other extraordinary circumstances
9 For the avoidance of doubt the term ldquofloating-raterdquo shall also include similar terms such as ldquovariable-raterdquo and ldquoadjustable-raterdquo
10 The Adviser expects that under normal market conditions generally for a corporate bond to be considered as an eligible investment after taking into account such an investment at least 75 of the Fundrsquos net assets that are invested in floating-rate corporate bonds and as described below fixed-rate corporate bonds (in the aggregate) will be comprised of corporate bonds that have at the time of original issuance $100 million or more par amount outstanding
11 ldquoAgency securitiesrdquo for these purposes generally includes securities issued by the following entities Government National Mortgage Association (Ginnie Mae) Federal National Mortgage Association (Fannie Mae) Federal Home Loan Banks (FHLBanks) Federal Home Loan Mortgage Corporation (Freddie Mac) Farm Credit System (FCS) Farm Credit Banks (FCBanks) Student Loan Marketing Association (Sallie Mae) Resolution Funding Corporation (REFCORP) Financing Corporation (FICO) and the Farm Credit System (FCS) Financial Assistance Corporation (FAC) Agency securities can include but are not limited to mortgage-backed securities
12 ldquoPrivately-issued securitiesrdquo for these purposes generally includes Rule 144A securities other than mortgage-backed Rule 144A securities Under normal market conditions privately-issued securities will have at the time of original issuance $100 million or more principal amount outstanding to be considered eligible investments
SR-NASDAQ-2015-011 Amendment No 2 Page 8 of 64
securities 13 floating-rate mortgage-backed securities14 floating-rate loans 15 and
investment companies16 (including investment companies advised by the Adviser) that
13 Asset-backed securities are securities that are backed by a pool of assets The Fund currently intends to invest in asset-backed securities that are consumer asset-backed securities
14 Mortgage-backed securities which are securities that directly or indirectly represent a participation in or are secured by and payable from mortgage loans on real property will consist of (1) residential mortgage-backed securities (ldquoRMBSrdquo) (2) commercial mortgage-backed securities (ldquoCMBSrdquo) (3) stripped mortgage-backed securities (ldquoSMBSrdquo) which are mortgage-backed securities where mortgage payments are divided between paying the loanrsquos principal and paying the loanrsquos interest (4) collateralized mortgage obligations (ldquoCMOsrdquo) and real estate mortgage investment conduits (ldquoREMICsrdquo) which are mortgage-backed securities that are divided into multiple classes with each class being entitled to a different share of the principal and interest payments received from the pool of underlying assets
15 The floating-rate loans in which the Fund will invest will represent amounts borrowed by companies or other entities from banks and other lenders and a significant portion of such floating-rate loans may be rated below investment grade or unrated Floating-rate loans held by the Fund may be senior or subordinate obligations of the borrower and may or may not be secured by collateral First lien senior secured floating-rate loans are referred to herein as ldquosenior loansrdquo Floating-rate loans that are not senior loans (ie unsecured floating-rate loans and secured floating-rate loans that are not first lien floating-rate loans) are referred to herein as ldquojunior loansrdquo The Fund will generally invest in floating-rate loans that the Adviser deems to be liquid with readily available prices notwithstanding the foregoing the Fund may invest in floating-rate loans that are deemed illiquid so long as the Fund complies with the 15 limitation on investments of its net assets in illiquid assets described below under ldquoInvestment Restrictionsrdquo
16 The Fund currently anticipates investing only in registered open-end investment companies that are listed and traded in the US on registered exchanges (ie other ETFs) An ETF is an investment company registered under the 1940 Act that holds a portfolio of securities Many ETFs are designed to track the performance of a securities index including industry sector country and region indexes The Fund may invest in the securities of ETFs in excess of the limits imposed under the 1940 Act pursuant to exemptive orders obtained by other ETFs and their sponsors from the Commission In addition the Fund may invest in the securities of certain investment companies in excess of the limits imposed under the 1940 Act pursuant to an exemptive order obtained by the Trust and the Adviser from the Commission See Investment Company Act Release No 30377
SR-NASDAQ-2015-011 Amendment No 2 Page 9 of 64
invest primarily in the foregoing types of debt instruments17 (collectively ldquoFloating Rate
Debt Instrumentsrdquo)
At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade To be considered
ldquoinvestment graderdquo under normal market conditions rated Floating Rate Debt
Instruments will carry at the time of purchase a rating in the highest four rating
categories of at least one nationally recognized statistical ratings organization
(ldquoNRSROrdquo) (eg BBB- or higher by Standard amp Poorrsquos Ratings Services (ldquoSampPrdquo)
andor Fitch Ratings (ldquoFitchrdquo) or Baa3 or higher by Moodyrsquos Investors Service Inc
(ldquoMoodyrsquosrdquo)18 For unrated securities to be considered ldquoinvestment graderdquo under normal
market conditions such securities will be determined at the time of purchase to be of
comparable quality19 by the Adviser The Fund may invest up to 35 of its net assets in
(February 5 2013) (File No 812-13895) The ETFs in which the Fund may invest include Index Fund Shares (as described in Nasdaq Rule 5705) Portfolio Depository Receipts (as described in Nasdaq Rule 5705) and Managed Fund Shares (as described in Nasdaq Rule 5735) While the Fund may invest in inverse ETFs the Fund will not invest in leveraged or inverse leveraged (eg 2X or -3X) ETFs
17 The liquidity of a security especially in the case of asset-backed and mortgage-backed securities will be a substantial factor in the Fundrsquos security selection process Consistent with the discussion below under ldquoInvestment Restrictionsrdquo the Fund will not purchase any Floating Rate Debt Instruments (including asset-backed securities and mortgage-backed securities) that in the Adviserrsquos opinion are illiquid if as a result more than 15 of the value of the Fundrsquos net assets will be invested in illiquid assets
18 For the avoidance of doubt if a security is rated by multiple NRSROs and receives different ratings the Fund will treat the security as being rated in the highest rating category received from an NRSRO
19 Comparable quality of unrated securities will be determined by the Adviser based on fundamental credit analysis of the unrated security and comparable NRSRO-rated securities On a best efforts basis the Adviser will attempt to make a rating
SR-NASDAQ-2015-011 Amendment No 2 Page 10 of 64
securities that are at the time of investment rated below investment grade by each
NRSRO rating such securities (or securities that are unrated and determined by the
Adviser to be of comparable quality) commonly referred to as ldquohigh yieldrdquo or ldquojunkrdquo
bonds If subsequent to purchase by the Fund a security held by the Fund experiences a
decline in credit quality and falls below investment grade the Fund may continue to hold
the security and it will not cause the Fund to violate the 35 investment limitation
however the security will be taken into account for purposes of determining whether
purchases of additional securities will cause the Fund to violate such limitation
The Fund will limit its investments in asset-backed securities (excluding agency
mortgage-backed securities) and non-agency mortgage-backed securities (in the
aggregate) to 20 of its net assets20 In addition the Fund will limit its investments in
junior loans to 20 of its net assets
The Fund will hold debt securities (including in the aggregate Floating Rate
Debt Instruments and the fixed-rate debt securities described below) of at least 13
non-affiliated issuers
Other Investments
Under normal market conditions the Fund will invest primarily in the Floating
Rate Debt Instruments described above to meet its investment objective In addition the
determination based on publicly available data In making a ldquocomparable qualityrdquo determination the Adviser may consider for example whether the issuer of the security has issued other rated securities the nature and provisions of the relevant security whether the obligations under the relevant security are guaranteed by another entity and the rating of such guarantor (if any) relevant cash flows macroeconomic analysis andor sector or industry analysis
For the avoidance of doubt there is no limitation on the Fundrsquos investments in agency mortgage-backed securities
20
SR-NASDAQ-2015-011 Amendment No 2 Page 11 of 64
Fund may invest up to 20 of its net assets in the following types of fixed-rate debt
securities corporate21 and government bonds and notes agency securities22 instruments
of non-US issuers in developed markets privately-issued securities 23 asset-backed
securities 24 mortgage-backed securities 25 municipal bonds money market securities26
and investment companies27 (including investment companies advised by the Adviser)
that invest primarily in the foregoing types of debt securities
Further to pursue its investment objective the Fund may invest up to 20 of the
value of its net assets in exchange-listed options on US Treasury futures contracts and
exchange-listed US Treasury futures contracts28 The use of these derivative
transactions may allow the Fund to obtain net long or short exposures to selected interest
rates These derivatives may also be used to hedge risks including interest rate risks and
21 See footnote 10 above
22 See footnote 11 above
23 See footnote 12 above
24 See footnote 13 above
25 See footnote 14 above
26 ldquoMoney market securitiesrdquo for these purposes generally includes short-term high-quality obligations issued or guaranteed by the US Treasury or the agencies or instrumentalities of the US government short-term high-quality securities issued or guaranteed by non-US governments agencies and instrumentalities repurchase agreements commercial paper (both asset-backed and non-assetshybacked) and deposits and other obligations of US and non-US banks and financial institutions
27 See footnote 16 above
28 At least 90 of the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be invested in instruments that trade in markets that are members of the Intermarket Surveillance Group (ldquoISGrdquo) (see footnote 40 below) or are parties to a comprehensive surveillance sharing agreement with the Exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 12 of 64
credit risks associated with the Fundrsquos portfolio investments The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index
Investment Restrictions
The Fund will not invest 25 or more of the value of its total assets in securities
of issuers in any one industry This restriction does not apply to (a) obligations issued or
guaranteed by the US government its agencies or instrumentalities or (b) securities of
other investment companies29
The Fund may hold up to an aggregate amount of 15 of its net assets in illiquid
assets (calculated at the time of investment) including Rule 144A securities deemed
illiquid by the Adviser30 The Fund will monitor its portfolio liquidity on an ongoing
basis to determine whether in light of current circumstances an adequate level of
liquidity is being maintained and will consider taking appropriate steps in order to
maintain adequate liquidity if through a change in values net assets or other
circumstances more than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid
assets include securities subject to contractual or other restrictions on resale and other
29 See Form N-1A Item 9 The Commission has taken the position that a fund is concentrated if it invests more than 25 of the value of its total assets in any one industry See eg Investment Company Act Release No 9011 (October 30 1975) 40 FR 54241 (November 21 1975)
30 In reaching liquidity decisions the Adviser may consider the following factors the frequency of trades and quotes for the security the number of dealers wishing to purchase or sell the security and the number of other potential purchasers dealer undertakings to make a market in the security and the nature of the security and the nature of the marketplace in which it trades (eg the time needed to dispose of the security the method of soliciting offers and the mechanics of transfer)
SR-NASDAQ-2015-011 Amendment No 2 Page 13 of 64
instruments that lack readily available markets as determined in accordance with
Commission staff guidance31
The Fund will not invest in non-US equity securities
Creation and Redemption of Shares
The Fund will issue and redeem Shares on a continuous basis at net asset value
(ldquoNAVrdquo)32 only in large blocks of Shares (ldquoCreation Unitsrdquo) in transactions with
authorized participants generally including broker-dealers and large institutional
investors (ldquoAuthorized Participantsrdquo) Creation Units generally will consist of 50000
Shares although this may change from time to time Creation Units however are not
expected to consist of less than 50000 Shares As described in the Registration
Statement and consistent with the Exemptive Relief the Fund will issue and redeem
Creation Units in exchange for an in-kind portfolio of instruments andor cash in lieu of
31 The Commission has stated that long-standing Commission guidelines have required open-end funds to hold no more than 15 of their net assets in illiquid securities and other illiquid assets See Investment Company Act Release No 28193 (March 11 2008) 73 FR 14618 (March 18 2008) footnote 34 See also Investment Company Act Release No 5847 (October 21 1969) 35 FR 19989 (December 31 1970) (Statement Regarding ldquoRestricted Securitiesrdquo) Investment Company Act Release No 18612 (March 12 1992) 57 FR 9828 (March 20 1992) (Revisions of Guidelines to Form N-1A) A fundrsquos portfolio security is illiquid if it cannot be disposed of in the ordinary course of business within seven days at approximately the value ascribed to it by the fund See Investment Company Act Release No 14983 (March 12 1986) 51 FR 9773 (March 21 1986) (adopting amendments to Rule 2a-7 under the 1940 Act) Investment Company Act Release No 17452 (April 23 1990) 55 FR 17933 (April 30 1990) (adopting Rule 144A under the Securities Act of 1933)
32 The NAV of the Fundrsquos Shares generally will be calculated once daily Monday through Friday as of the close of regular trading on the New York Stock Exchange generally 400 pm Eastern Time (the ldquoNAV Calculation Timerdquo) NAV per Share will be calculated by dividing the Fundrsquos net assets by the number of Fund Shares outstanding For more information regarding the valuation of Fund investments in calculating the Fundrsquos NAV see the Registration Statement
SR-NASDAQ-2015-011 Amendment No 2 Page 14 of 64
such instruments (the ldquoCreation Basketrdquo) In addition if there is a difference between the
NAV attributable to a Creation Unit and the market value of the Creation Basket
exchanged for the Creation Unit the party conveying instruments with the lower value
will pay to the other an amount in cash equal to the difference (referred to as the ldquoCash
Componentrdquo)
Creations and redemptions must be made by or through an Authorized Participant
that has executed an agreement that has been agreed to by the Distributor and BNY with
respect to creations and redemptions of Creation Units All standard orders to create
Creation Units must be received by the transfer agent no later than the closing time of the
regular trading session on the New York Stock Exchange (ordinarily 400 pm Eastern
Time) (the ldquoClosing Timerdquo) in each case on the date such order is placed in order for the
creation of Creation Units to be effected based on the NAV of Shares as next determined
on such date after receipt of the order in proper form Shares may be redeemed only in
Creation Units at their NAV next determined after receipt not later than the Closing Time
of a redemption request in proper form by the Fund through the transfer agent and only
on a business day
The Fundrsquos custodian through the National Securities Clearing Corporation will
make available on each business day prior to the opening of business of the Exchange
the list of the names and quantities of the instruments comprising the Creation Basket as
well as the estimated Cash Component (if any) for that day The published Creation
Basket will apply until a new Creation Basket is announced on the following business
day prior to commencement of trading in the Shares
SR-NASDAQ-2015-011 Amendment No 2 Page 15 of 64
Net Asset Value
The Fundrsquos NAV will be determined as of the close of trading (normally
400 pm Eastern Time) on each day the New York Stock Exchange is open for
business NAV will be calculated for the Fund by taking the market price of the Fundrsquos
total assets including interest or dividends accrued but not yet collected less all
liabilities and dividing such amount by the total number of Shares outstanding The
result rounded to the nearest cent will be the NAV per Share All valuations will be
subject to review by the Board of Trustees of the Trust (ldquoTrust Boardrdquo) or its delegate
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with valuation procedures (which may be revised from time to time) adopted by the Trust
Board (the ldquoValuation Proceduresrdquo) and in accordance with the 1940 Act A market
valuation generally means a valuation (i) obtained from an exchange an independent
pricing service (ldquoPricing Servicerdquo) or a major market maker (or dealer) or (ii) based on a
price quotation or other equivalent indication of value supplied by an exchange a Pricing
Service or a major market maker (or dealer) The information summarized below is
based on the Valuation Procedures as currently in effect however as noted above the
Valuation Procedures are amended from time to time and therefore such information is
subject to change
Certain securities including Floating Rate Debt Instruments in which the Fund
may invest will not be listed on any securities exchange or board of trade Such
securities will typically be bought and sold by institutional investors in individually
negotiated private transactions that function in many respects like an over-the-counter
SR-NASDAQ-2015-011 Amendment No 2 Page 16 of 64
secondary market although typically no formal market makers will exist Certain
securities particularly debt securities will have few or no trades or trade infrequently
and information regarding a specific security may not be widely available or may be
incomplete Accordingly determinations of the fair value of debt securities may be
based on infrequent and dated information Because there is less reliable objective data
available elements of judgment may play a greater role in valuation of debt securities
than for other types of securities Typically Floating Rate Debt Instruments and other
debt securities in which the Fund may invest (other than those described below) will be
valued using information provided by a Pricing Service Debt securities having a
remaining maturity of 60 days or less when purchased will be valued at cost adjusted for
amortization of premiums and accretion of discounts provided the Adviserrsquos pricing
committee (the ldquoPricing Committeerdquo) has determined that the use of amortized cost is an
appropriate reflection of fair value given market and issuer-specific conditions existing at
the time of the determination Overnight repurchase agreements will be valued at cost
and term repurchase agreements (ie those whose maturity exceeds seven days) will be
valued at the average of the bid quotations obtained daily from at least two recognized
dealers
Asset-backed and mortgage-backed securities will generally be valued by using a
Pricing Service If a Pricing Service does not cover a particular asset-backed or
mortgage-backed security or discontinues covering a particular asset-backed or
mortgage-backed security the security will be priced using broker quotes generally
provided by brokers that make or participate in markets in the security To derive values
Pricing Services and broker-dealers may use matrix pricing and valuation models as well
SR-NASDAQ-2015-011 Amendment No 2 Page 17 of 64
as recent market transactions for the same or similar assets As it deems appropriate the
Pricing Committee may determine that a Pricing Service price does not represent an
accurate value of an asset-backed or mortgage-backed security based on broker quotes it
receives a recent trade in the security by the Fund information from a portfolio manager
or other market information In the event that the Pricing Committee determines that the
Pricing Service price is unreliable or inaccurate based on such other information broker
quotes may be used Additionally if the Pricing Committee determines that the price of
an asset-backed or mortgage-backed security obtained from a Pricing Service and
available broker quotes is unreliable or inaccurate due to market conditions or other
reasons or if a Pricing Service price or broker quote is unavailable the security will be
valued using fair value pricing as described below
Equity securities listed on any exchange other than the Exchange will be valued at
the last sale price on the exchange on which they are principally traded on the business
day as of which such value is being determined Equity securities listed on the Exchange
will be valued at the official closing price on the business day as of which such value is
being determined If there has been no sale on such day or no official closing price in
the case of securities traded on the Exchange the securities will be valued using fair
value pricing as described below Equity securities traded on more than one securities
exchange will be valued at the last sale price or official closing price as applicable on
the business day as of which such value is being determined at the close of the exchange
representing the principal market for such securities
Exchange-traded options and futures contracts will be valued at the closing price
in the market where such contracts are principally traded
SR-NASDAQ-2015-011 Amendment No 2 Page 18 of 64
Certain securities including Floating Rate Debt Instruments in which the Fund
will invest will not be able to be priced by pre-established pricing methods Such
securities may be valued by the Trust Board or its delegate at fair value The use of fair
value pricing by the Fund will be governed by the Valuation Procedures and conducted in
accordance with the provisions of the 1940 Act Valuing the Fundrsquos securities using fair
value pricing will result in using prices for those securities that may differ from current
market valuations or official closing prices on the applicable exchange
Availability of Information
The Fundrsquos website (wwwftportfolioscom) which will be publicly available
prior to the public offering of Shares will include a form of the prospectus for the Fund
that may be downloaded The website will include the Sharesrsquo ticker CUSIP and
exchange information along with additional quantitative information updated on a daily
basis including for the Fund (1) daily trading volume the prior business dayrsquos reported
NAV and closing price mid-point of the bidask spread at the time of calculation of such
NAV (the ldquoBidAsk Pricerdquo)33 and a calculation of the premium and discount of the
BidAsk Price against the NAV and (2) data in chart format displaying the frequency
distribution of discounts and premiums of the daily BidAsk Price against the NAV
within appropriate ranges for each of the four previous calendar quarters On each
business day before commencement of trading in Shares in the Regular Market Session34
33 The BidAsk Price of the Fund will be determined using the mid-point of the highest bid and the lowest offer on the Exchange as of the time of calculation of the Fundrsquos NAV The records relating to BidAsk Prices will be retained by the Fund and its service providers
34 See Nasdaq Rule 4120(b)(4) (describing the three trading sessions on the Exchange (1) Pre-Market Session from 4 am to 930 am Eastern Time (2)
SR-NASDAQ-2015-011 Amendment No 2 Page 19 of 64
on the Exchange the Fund will disclose on its website the identities and quantities of the
portfolio of securities and other assets (the ldquoDisclosed Portfoliordquo as defined in Nasdaq
Rule 5735(c)(2)) held by the Fund that will form the basis for the Fundrsquos calculation of
NAV at the end of the business day 35 The Fundrsquos disclosure of derivative positions in
the Disclosed Portfolio will include information that market participants can use to value
these positions intraday On a daily basis the Fund will disclose on the Fundrsquos website
the following information regarding each portfolio holding as applicable to the type of
holding ticker symbol CUSIP number or other identifier if any a description of the
holding (including the type of holding) the identity of the security or other asset or
instrument underlying the holding if any for options the option strike price quantity
held (as measured by for example par value notional value or number of shares
contracts or units) maturity date if any coupon rate if any effective date if any market
value of the holding and percentage weighting of the holding in the Fundrsquos portfolio
The website information will be publicly available at no charge
In addition for the Fund an estimated value defined in Rule 5735(c)(3) as the
ldquoIntraday Indicative Valuerdquo that reflects an estimated intraday value of the Fundrsquos
Disclosed Portfolio will be disseminated Moreover the Intraday Indicative Value
Regular Market Session from 930 am to 4 pm or 415 pm Eastern Time and (3) Post-Market Session from 4 pm or 415 pm to 8 pm Eastern Time)
Under accounting procedures to be followed by the Fund trades made on the prior business day (ldquoTrdquo) will be booked and reflected in NAV on the current business day (ldquoT+1rdquo) Accordingly the Fund will be able to disclose at the beginning of the business day the portfolio that will form the basis for the NAV calculation at the end of the business day
35
SR-NASDAQ-2015-011 Amendment No 2 Page 20 of 64
available on the NASDAQ OMX Information LLC proprietary index data service36 will
be based upon the current value for the components of the Disclosed Portfolio and will be
updated and widely disseminated by one or more major market data vendors and broadly
displayed at least every 15 seconds during the Regular Market Session The Intraday
Indicative Value will be based on quotes and closing prices from the securitiesrsquo local
market and may not reflect events that occur subsequent to the local marketrsquos close
Premiums and discounts between the Intraday Indicative Value and the market price may
occur This should not be viewed as a ldquoreal timerdquo update of the NAV per Share of the
Fund which is calculated only once a day
The dissemination of the Intraday Indicative Value together with the Disclosed
Portfolio will allow investors to determine the value of the underlying portfolio of the
Fund on a daily basis and will provide a close estimate of that value throughout the
trading day
Investors will also be able to obtain the Fundrsquos Statement of Additional
Information (ldquoSAIrdquo) the Fundrsquos annual and semi-annual reports (together ldquoShareholder
Reportsrdquo) and its Form N-CSR and Form N-SAR filed twice a year The Fundrsquos SAI
and Shareholder Reports will be available free upon request from the Fund and those
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or
downloaded from the Commissionrsquos website at wwwsecgov Information regarding
market price and trading volume of the Shares will be continually available on a real-time
Currently the NASDAQ OMX Global Index Data Service (ldquoGIDSrdquo) is the NASDAQ OMX global index data feed service offering real-time updates daily summary messages and access to widely followed indexes and Intraday Indicative Values for ETFs GIDS provides investment professionals with the daily information needed to track or trade NASDAQ OMX indexes listed ETFs or third-party partner indexes and ETFs
36
SR-NASDAQ-2015-011 Amendment No 2 Page 21 of 64
basis throughout the day on brokersrsquo computer screens and other electronic services
Information regarding the previous dayrsquos closing price and trading volume information
for the Shares will be published daily in the financial section of newspapers Quotation
and last sale information for the Shares will be available via Nasdaq proprietary quote
and trade services as well as in accordance with the Unlisted Trading Privileges and the
Consolidated Tape Association (ldquoCTArdquo) plans for the Shares Quotation and last sale
information for the other ETFs in which the Fund will invest will be available via the
quote and trade services of their respective primary exchanges as well as in accordance
with the Unlisted Trading Privileges and the CTA plans as applicable Quotation and
last sale information for US exchange-traded options will be available via the Options
Price Reporting Authority Intraday executable price quotations on Floating Rate Debt
Instruments and other assets not traded on an exchange will be available from major
broker-dealer firms or market data vendors as well as from automated quotation systems
published or other public sources or online information services Additionally the Trade
Reporting and Compliance Engine (ldquoTRACErdquo) of the Financial Industry Regulatory
Authority (ldquoFINRArdquo) will be a source of price information for corporate bonds
privately-issued securities mortgage-backed securities and asset-backed securities to the
extent transactions in such securities are reported to TRACE37 For exchange-traded
assets intraday pricing information will be available directly from the applicable listing
exchange
Broker-dealers that are FINRA member firms have an obligation to report transactions in specified debt securities to TRACE to the extent required under applicable FINRA rules Generally such debt securities will have at issuance a maturity that exceeds one calendar year
37
SR-NASDAQ-2015-011 Amendment No 2 Page 22 of 64
Additional information regarding the Fund and the Shares including investment
strategies risks creation and redemption procedures fees Fund holdings disclosure
policies distributions and taxes will be included in the Registration Statement
Initial and Continued Listing
The Shares will be subject to Rule 5735 which sets forth the initial and continued
listing criteria applicable to Managed Fund Shares The Exchange represents that for
initial andor continued listing the Fund must be in compliance with Rule 10A-338 under
the Act A minimum of 100000 Shares will be outstanding at the commencement of
trading on the Exchange The Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the NAV and the
Disclosed Portfolio will be made available to all market participants at the same time
Trading Halts
With respect to trading halts the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading in the Shares of the Fund Nasdaq will
halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12) Trading may be
halted because of market conditions or for reasons that in the view of the Exchange
make trading in the Shares inadvisable These may include (1) the extent to which
trading is not occurring in the securities andor the other assets constituting the Disclosed
Portfolio of the Fund or (2) whether other unusual conditions or circumstances
detrimental to the maintenance of a fair and orderly market are present Trading in the
See 17 CFR 24010A-3 38
SR-NASDAQ-2015-011 Amendment No 2 Page 23 of 64
Shares also will be subject to Rule 5735(d)(2)(D) which sets forth circumstances under
which Shares of the Fund may be halted
Trading Rules
Nasdaq deems the Shares to be equity securities thus rendering trading in the
Shares subject to Nasdaqrsquos existing rules governing the trading of equity securities
Nasdaq will allow trading in the Shares from 400 am until 800 pm Eastern Time
The Exchange has appropriate rules to facilitate transactions in the Shares during all
trading sessions As provided in Nasdaq Rule 5735(b)(3) the minimum price variation
for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $001
Surveillance
The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws39 The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities laws
The surveillances referred to above generally focus on detecting securities trading
outside their normal patterns which could be indicative of manipulative or other violative
activity When such situations are detected surveillance analysis follows and
investigations are opened where appropriate to review the behavior of all relevant
parties for all relevant trading violations
FINRA surveils trading on the Exchange pursuant to a regulatory services agreement The Exchange is responsible for FINRArsquos performance under this regulatory services agreement
39
SR-NASDAQ-2015-011 Amendment No 2 Page 24 of 64
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 25 of 64
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
b Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
SR-NASDAQ-2015-011 Amendment No 2 Page 26 of 64
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
SR-NASDAQ-2015-011 Amendment No 2 Page 27 of 64
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
SR-NASDAQ-2015-011 Amendment No 2 Page 28 of 64
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
SR-NASDAQ-2015-011 Amendment No 2 Page 29 of 64
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
SR-NASDAQ-2015-011 Amendment No 2 Page 30 of 64
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
SR-NASDAQ-2015-011 Amendment No 2 Page 31 of 64
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
4 Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
5 Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received from Members Participants or Others
Written comments were neither solicited nor received
6 Extension of Time Period for Commission Action
The Exchange does not consent at this time to an extension of any time period for
Commission action
7 Basis for Summary Effectiveness Pursuant to Section 19(b)(3) or for Accelerated Effectiveness Pursuant to Section 19(b)(2)
Not applicable
8 Proposed Rule Change Based on Rules of Another Self-Regulatory Organization or of the Commission
Not applicable
9 Security-Based Swap Submissions Filed Pursuant to Section 3C of the Act
Not applicable
SR-NASDAQ-2015-011 Amendment No 2 Page 32 of 64
10 Advance Notices Filed Pursuant to Section 806(e) of the Payment Clearing and Settlement Supervision Act
Not applicable
11 Exhibits
1 Completed notice of proposed rule change for publication in the Federal
Register
SR-NASDAQ-2015-011 Amendment No 2 Page 33 of 64
EXHIBIT 1
SECURITIES AND EXCHANGE COMMISSION (Release No 34shy File No SR-NASDAQ-2015-011)
April __ 2015
Self-Regulatory Organizations The NASDAQ Stock Market LLC Notice of Filing of Proposed Rule Change Relating to the Listing and Trading of the Shares of the First Trust Strategic Floating Rate ETF of First Trust Exchange-Traded Fund IV
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (ldquoActrdquo)1 and
Rule 19b-4 thereunder2 notice is hereby given that on February 12 2015 The NASDAQ
Stock Market LLC (ldquoNasdaqrdquo or the ldquoExchangerdquo) filed with the Securities and Exchange
Commission (ldquoCommissionrdquo) the proposed rule change as described in in Items I II and
III below which Items have been prepared by Nasdaq On April 6 2015 Nasdaq filed
Amendment No 1 which replaced the text of the original filing in its entirety On April
15 2015 Nasdaq filed Amendment No 2 which replaced the text of the original filing in
its entirety The Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons
I Self-Regulatory Organizationrsquos Statement of the Terms of Substance of the Proposed Rule Change
Nasdaq proposes to list and trade the shares of the First Trust Strategic Floating
Rate ETF (the ldquoFundrdquo) of the First Trust Strategic Floating Rate ETF (the ldquoFundrdquo) of
First Trust Exchange-Traded Fund IV (the ldquoTrustrdquo) under Nasdaq Rule 5735 (ldquoManaged
1 15 USC 78s(b)(1)
2 17 CFR 24019b-4
SR-NASDAQ-2015-011 Amendment No 2 Page 34 of 64
Fund Sharesrdquo)3 The shares of the Fund are collectively referred to herein as the
ldquoSharesrdquo
The text of the proposed rule change is available at
httpnasdaqcchwallstreetcom at Nasdaqrsquos principal office and at the Commissionrsquos
Public Reference Room
II Self-Regulatory Organizationrsquos Statement of the Purpose of and Statutory Basis for the Proposed Rule Change
In its filing with the Commission Nasdaq included statements concerning the
purpose of and basis for the proposed rule change The text of these statements may be
examined at the places specified in Item IV below Nasdaq has prepared summaries set
forth in Sections A B and C below of the most significant aspects of such statements
A Self-Regulatory Organizationrsquos Statement of the Purpose of and Statutory Basis for the Proposed Rule Change
1 Purpose
The Exchange proposes to list and trade the Shares of the Fund under Nasdaq
Rule 5735 which governs the listing and trading of Managed Fund Shares4 on the
3 The Commission approved Nasdaq Rule 5735 in Securities Exchange Act Release No 57962 (June 13 2008) 73 FR 35175 (June 20 2008) (SR-NASDAQ-2008shy039) There are already multiple actively-managed funds listed on the Exchange see eg Securities Exchange Act Release Nos 69464 (April 26 2013) 78 FR 25774 (May 2 2013) (SR-NASDAQ-2013-036) (order approving listing and trading of First Trust Senior Loan Fund) 68972 (February 22 2013) 78 FR 13721 (February 28 2013) (SR-NASDAQ-2012-147) (order approving listing and trading of First Trust High Yield LongShort ETF) 66489 (February 29 2012) 77 FR 13379 (March 6 2012) (SR-NASDAQ-2012-004) (order approving listing and trading of WisdomTree Emerging Markets Corporate Bond Fund) The Exchange believes the proposed rule change raises no significant issues not previously addressed in those prior Commission orders
4 A Managed Fund Share is a security that represents an interest in an investment company registered under the Investment Company Act of 1940 (15 USC 80ashy
SR-NASDAQ-2015-011 Amendment No 2 Page 35 of 64
Exchange The Fund will be an actively-managed exchange-traded fund (ldquoETFrdquo) The
Shares will be offered by the Trust which was established as a Massachusetts business
trust on September 15 20105 The Trust is registered with the Commission as an
investment company and has filed a registration statement on Form N-1A (ldquoRegistration
Statementrdquo) with the Commission6 The Fund will be a series of the Trust The Fund
intends to qualify each year as a regulated investment company (ldquoRICrdquo) under
Subchapter M of the Internal Revenue Code of 1986 as amended
First Trust Advisors LP will be the investment adviser (ldquoAdviserrdquo) to the Fund
First Trust Portfolios LP (the ldquoDistributorrdquo) will be the principal underwriter and
distributor of the Fundrsquos Shares The Bank of New York Mellon Corporation (ldquoBNYrdquo)
will act as the administrator accounting agent custodian and transfer agent to the Fund
1) (the ldquo1940 Actrdquo) organized as an open-end investment company or similar entity that invests in a portfolio of securities selected by its investment adviser consistent with its investment objectives and policies In contrast an open-end investment company that issues Index Fund Shares listed and traded on the Exchange under Nasdaq Rule 5705 seeks to provide investment results that correspond generally to the price and yield performance of a specific foreign or domestic stock index fixed income securities index or combination thereof
5 The Commission has issued an order upon which the Trust may rely granting certain exemptive relief under the 1940 Act See Investment Company Act Release No 30029 (April 10 2012) (File No 812-13795) (the ldquoExemptive Reliefrdquo) In addition the Commission has issued no-action relief upon which the Trust may rely pertaining to the Fundrsquos ability to invest in derivatives notwithstanding certain representations in the application for the Exemptive Relief See Commission No-Action Letter (December 6 2012)
6 See Post-Effective Amendment No 104 to Registration Statement on Form N-1A for the Trust dated January 29 2015 (File Nos 333-174332 and 811-22559) The descriptions of the Fund and the Shares contained herein are based in part on information in the Registration Statement
7
SR-NASDAQ-2015-011 Amendment No 2 Page 36 of 64
Paragraph (g) of Rule 5735 provides that if the investment adviser to the
investment company issuing Managed Fund Shares is affiliated with a broker-dealer
such investment adviser shall erect a ldquofire wallrdquo between the investment adviser and the
broker-dealer with respect to access to information concerning the composition andor
changes to such investment company portfolio7 In addition paragraph (g) further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio Rule 5735(g) is similar
to Nasdaq Rule 5705(b)(5)(A)(i) however paragraph (g) in connection with the
establishment of a ldquofire wallrdquo between the investment adviser and the broker-dealer
reflects the applicable open-end fundrsquos portfolio not an underlying benchmark index as
is the case with index-based funds The Adviser is not a broker-dealer although it is
affiliated with the Distributor a broker-dealer The Adviser has implemented a fire wall
An investment adviser to an open-end fund is required to be registered under the Investment Advisers Act of 1940 (the ldquoAdvisers Actrdquo) As a result the Adviser and its related personnel are subject to the provisions of Rule 204A-1 under the Advisers Act relating to codes of ethics This Rule requires investment advisers to adopt a code of ethics that reflects the fiduciary nature of the relationship to clients as well as compliance with other applicable securities laws Accordingly procedures designed to prevent the communication and misuse of non-public information by an investment adviser must be consistent with Rule 204A-1 under the Advisers Act In addition Rule 206(4)-7 under the Advisers Act makes it unlawful for an investment adviser to provide investment advice to clients unless such investment adviser has (i) adopted and implemented written policies and procedures reasonably designed to prevent violation by the investment adviser and its supervised persons of the Advisers Act and the Commission rules adopted thereunder (ii) implemented at a minimum an annual review regarding the adequacy of the policies and procedures established pursuant to subparagraph (i) above and the effectiveness of their implementation and (iii) designated an individual (who is a supervised person) responsible for administering the policies and procedures adopted under subparagraph (i) above
8
SR-NASDAQ-2015-011 Amendment No 2 Page 37 of 64
with respect to its broker-dealer affiliate regarding access to information concerning the
composition andor changes to the portfolio In addition personnel who make decisions
on the Fundrsquos portfolio composition will be subject to procedures designed to prevent the
use and dissemination of material non-public information regarding the Fundrsquos portfolio
In the event (a) the Adviser becomes or becomes newly affiliated with a broker-dealer
or (b) any new adviser or sub-adviser is a registered broker-dealer or becomes affiliated
with another broker-dealer it will implement a fire wall with respect to its relevant
personnel andor such broker-dealer affiliate as applicable regarding access to
information concerning the composition andor changes to the portfolio and will be
subject to procedures designed to prevent the use and dissemination of material
non-public information regarding such portfolio The Fund does not currently intend to
use a sub-adviser
First Trust Strategic Floating Rate ETF
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions8 at least 80 of its
The term ldquounder normal market conditionsrdquo as used herein includes but is not limited to the absence of adverse market economic political or other conditions including extreme volatility or trading halts in the fixed income markets or the financial markets generally operational issues causing dissemination of inaccurate market information or force majeure type events such as systems failure natural or man-made disaster act of God armed conflict act of terrorism riot or labor disruption or any similar intervening circumstance For temporary defensive purposes during the initial invest-up period and during periods of high cash inflows or outflows the Fund may depart from its principal investment strategies for example it may hold a higher than normal proportion of its assets in cash During such periods the Fund may not be able to achieve its investment objective The Fund may adopt a defensive strategy when the Adviser believes securities in which the Fund normally invests have elevated risks due to political or economic factors and in other extraordinary circumstances
SR-NASDAQ-2015-011 Amendment No 2 Page 38 of 64
net assets in a portfolio of the following types of floating-rate9 debt instruments issued by
US and non-US public- and private-sector entities floating-rate corporate10 and
government bonds and notes floating-rate agency securities 11 floating-rate instruments
of non-US issuers floating-rate privately-issued securities 12 floating-rate asset-backed
securities 13 floating-rate mortgage-backed securities14 floating-rate loans 15 and
9 For the avoidance of doubt the term ldquofloating-raterdquo shall also include similar terms such as ldquovariable-raterdquo and ldquoadjustable-raterdquo
10 The Adviser expects that under normal market conditions generally for a corporate bond to be considered as an eligible investment after taking into account such an investment at least 75 of the Fundrsquos net assets that are invested in floating-rate corporate bonds and as described below fixed-rate corporate bonds (in the aggregate) will be comprised of corporate bonds that have at the time of original issuance $100 million or more par amount outstanding
11 ldquoAgency securitiesrdquo for these purposes generally includes securities issued by the following entities Government National Mortgage Association (Ginnie Mae) Federal National Mortgage Association (Fannie Mae) Federal Home Loan Banks (FHLBanks) Federal Home Loan Mortgage Corporation (Freddie Mac) Farm Credit System (FCS) Farm Credit Banks (FCBanks) Student Loan Marketing Association (Sallie Mae) Resolution Funding Corporation (REFCORP) Financing Corporation (FICO) and the Farm Credit System (FCS) Financial Assistance Corporation (FAC) Agency securities can include but are not limited to mortgage-backed securities
12 ldquoPrivately-issued securitiesrdquo for these purposes generally includes Rule 144A securities other than mortgage-backed Rule 144A securities Under normal market conditions privately-issued securities will have at the time of original issuance $100 million or more principal amount outstanding to be considered eligible investments
13 Asset-backed securities are securities that are backed by a pool of assets The Fund currently intends to invest in asset-backed securities that are consumer asset-backed securities
14 Mortgage-backed securities which are securities that directly or indirectly represent a participation in or are secured by and payable from mortgage loans on real property will consist of (1) residential mortgage-backed securities (ldquoRMBSrdquo) (2) commercial mortgage-backed securities (ldquoCMBSrdquo) (3) stripped mortgage-backed securities (ldquoSMBSrdquo) which are mortgage-backed securities
SR-NASDAQ-2015-011 Amendment No 2 Page 39 of 64
investment companies16 (including investment companies advised by the Adviser) that
invest primarily in the foregoing types of debt instruments17 (collectively ldquoFloating Rate
Debt Instrumentsrdquo)
where mortgage payments are divided between paying the loanrsquos principal and paying the loanrsquos interest (4) collateralized mortgage obligations (ldquoCMOsrdquo) and real estate mortgage investment conduits (ldquoREMICsrdquo) which are mortgage-backed securities that are divided into multiple classes with each class being entitled to a different share of the principal and interest payments received from the pool of underlying assets
15 The floating-rate loans in which the Fund will invest will represent amounts borrowed by companies or other entities from banks and other lenders and a significant portion of such floating-rate loans may be rated below investment grade or unrated Floating-rate loans held by the Fund may be senior or subordinate obligations of the borrower and may or may not be secured by collateral First lien senior secured floating-rate loans are referred to herein as ldquosenior loansrdquo Floating-rate loans that are not senior loans (ie unsecured floating-rate loans and secured floating-rate loans that are not first lien floating-rate loans) are referred to herein as ldquojunior loansrdquo The Fund will generally invest in floating-rate loans that the Adviser deems to be liquid with readily available prices notwithstanding the foregoing the Fund may invest in floating-rate loans that are deemed illiquid so long as the Fund complies with the 15 limitation on investments of its net assets in illiquid assets described below under ldquoInvestment Restrictionsrdquo
16 The Fund currently anticipates investing only in registered open-end investment companies that are listed and traded in the US on registered exchanges (ie other ETFs) An ETF is an investment company registered under the 1940 Act that holds a portfolio of securities Many ETFs are designed to track the performance of a securities index including industry sector country and region indexes The Fund may invest in the securities of ETFs in excess of the limits imposed under the 1940 Act pursuant to exemptive orders obtained by other ETFs and their sponsors from the Commission In addition the Fund may invest in the securities of certain investment companies in excess of the limits imposed under the 1940 Act pursuant to an exemptive order obtained by the Trust and the Adviser from the Commission See Investment Company Act Release No 30377 (February 5 2013) (File No 812-13895) The ETFs in which the Fund may invest include Index Fund Shares (as described in Nasdaq Rule 5705) Portfolio Depository Receipts (as described in Nasdaq Rule 5705) and Managed Fund Shares (as described in Nasdaq Rule 5735) While the Fund may invest in inverse ETFs the Fund will not invest in leveraged or inverse leveraged (eg 2X or -3X) ETFs
SR-NASDAQ-2015-011 Amendment No 2 Page 40 of 64
At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade To be considered
ldquoinvestment graderdquo under normal market conditions rated Floating Rate Debt
Instruments will carry at the time of purchase a rating in the highest four rating
categories of at least one nationally recognized statistical ratings organization
(ldquoNRSROrdquo) (eg BBB- or higher by Standard amp Poorrsquos Ratings Services (ldquoSampPrdquo)
andor Fitch Ratings (ldquoFitchrdquo) or Baa3 or higher by Moodyrsquos Investors Service Inc
(ldquoMoodyrsquosrdquo)18 For unrated securities to be considered ldquoinvestment graderdquo under normal
market conditions such securities will be determined at the time of purchase to be of
comparable quality19 by the Adviser The Fund may invest up to 35 of its net assets in
securities that are at the time of investment rated below investment grade by each
NRSRO rating such securities (or securities that are unrated and determined by the
17 The liquidity of a security especially in the case of asset-backed and mortgage-backed securities will be a substantial factor in the Fundrsquos security selection process Consistent with the discussion below under ldquoInvestment Restrictionsrdquo the Fund will not purchase any Floating Rate Debt Instruments (including asset-backed securities and mortgage-backed securities) that in the Adviserrsquos opinion are illiquid if as a result more than 15 of the value of the Fundrsquos net assets will be invested in illiquid assets
18 For the avoidance of doubt if a security is rated by multiple NRSROs and receives different ratings the Fund will treat the security as being rated in the highest rating category received from an NRSRO
19 Comparable quality of unrated securities will be determined by the Adviser based on fundamental credit analysis of the unrated security and comparable NRSRO-rated securities On a best efforts basis the Adviser will attempt to make a rating determination based on publicly available data In making a ldquocomparable qualityrdquo determination the Adviser may consider for example whether the issuer of the security has issued other rated securities the nature and provisions of the relevant security whether the obligations under the relevant security are guaranteed by another entity and the rating of such guarantor (if any) relevant cash flows macroeconomic analysis andor sector or industry analysis
SR-NASDAQ-2015-011 Amendment No 2 Page 41 of 64
Adviser to be of comparable quality) commonly referred to as ldquohigh yieldrdquo or ldquojunkrdquo
bonds If subsequent to purchase by the Fund a security held by the Fund experiences a
decline in credit quality and falls below investment grade the Fund may continue to hold
the security and it will not cause the Fund to violate the 35 investment limitation
however the security will be taken into account for purposes of determining whether
purchases of additional securities will cause the Fund to violate such limitation
The Fund will limit its investments in asset-backed securities (excluding agency
mortgage-backed securities) and non-agency mortgage-backed securities (in the
aggregate) to 20 of its net assets20 In addition the Fund will limit its investments in
junior loans to 20 of its net assets
The Fund will hold debt securities (including in the aggregate Floating Rate
Debt Instruments and the fixed-rate debt securities described below) of at least 13
non-affiliated issuers
Other Investments
Under normal market conditions the Fund will invest primarily in the Floating
Rate Debt Instruments described above to meet its investment objective In addition the
Fund may invest up to 20 of its net assets in the following types of fixed-rate debt
securities corporate21 and government bonds and notes agency securities22 instruments
20 For the avoidance of doubt there is no limitation on the Fundrsquos investments in agency mortgage-backed securities
21 See footnote 10 above
22 See footnote 11 above
SR-NASDAQ-2015-011 Amendment No 2 Page 42 of 64
of non-US issuers in developed markets privately-issued securities 23 asset-backed
securities 24 mortgage-backed securities 25 municipal bonds money market securities26
and investment companies27 (including investment companies advised by the Adviser)
that invest primarily in the foregoing types of debt securities
Further to pursue its investment objective the Fund may invest up to 20 of the
value of its net assets in exchange-listed options on US Treasury futures contracts and
exchange-listed US Treasury futures contracts28 The use of these derivative
transactions may allow the Fund to obtain net long or short exposures to selected interest
rates These derivatives may also be used to hedge risks including interest rate risks and
credit risks associated with the Fundrsquos portfolio investments The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
23 See footnote 12 above
24 See footnote 13 above
25 See footnote 14 above
26 ldquoMoney market securitiesrdquo for these purposes generally includes short-term high-quality obligations issued or guaranteed by the US Treasury or the agencies or instrumentalities of the US government short-term high-quality securities issued or guaranteed by non-US governments agencies and instrumentalities repurchase agreements commercial paper (both asset-backed and non-assetshybacked) and deposits and other obligations of US and non-US banks and financial institutions
27 See footnote 16 above
28 At least 90 of the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be invested in instruments that trade in markets that are members of the Intermarket Surveillance Group (ldquoISGrdquo) (see footnote 40 below) or are parties to a comprehensive surveillance sharing agreement with the Exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 43 of 64
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index
Investment Restrictions
The Fund will not invest 25 or more of the value of its total assets in securities
of issuers in any one industry This restriction does not apply to (a) obligations issued or
guaranteed by the US government its agencies or instrumentalities or (b) securities of
other investment companies29
The Fund may hold up to an aggregate amount of 15 of its net assets in illiquid
assets (calculated at the time of investment) including Rule 144A securities deemed
illiquid by the Adviser30 The Fund will monitor its portfolio liquidity on an ongoing
basis to determine whether in light of current circumstances an adequate level of
liquidity is being maintained and will consider taking appropriate steps in order to
maintain adequate liquidity if through a change in values net assets or other
circumstances more than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid
assets include securities subject to contractual or other restrictions on resale and other
29 See Form N-1A Item 9 The Commission has taken the position that a fund is concentrated if it invests more than 25 of the value of its total assets in any one industry See eg Investment Company Act Release No 9011 (October 30 1975) 40 FR 54241 (November 21 1975)
30 In reaching liquidity decisions the Adviser may consider the following factors the frequency of trades and quotes for the security the number of dealers wishing to purchase or sell the security and the number of other potential purchasers dealer undertakings to make a market in the security and the nature of the security and the nature of the marketplace in which it trades (eg the time needed to dispose of the security the method of soliciting offers and the mechanics of transfer)
SR-NASDAQ-2015-011 Amendment No 2 Page 44 of 64
instruments that lack readily available markets as determined in accordance with
Commission staff guidance31
The Fund will not invest in non-US equity securities
Creation and Redemption of Shares
The Fund will issue and redeem Shares on a continuous basis at net asset value
(ldquoNAVrdquo)32 only in large blocks of Shares (ldquoCreation Unitsrdquo) in transactions with
authorized participants generally including broker-dealers and large institutional
investors (ldquoAuthorized Participantsrdquo) Creation Units generally will consist of 50000
Shares although this may change from time to time Creation Units however are not
expected to consist of less than 50000 Shares As described in the Registration
Statement and consistent with the Exemptive Relief the Fund will issue and redeem
Creation Units in exchange for an in-kind portfolio of instruments andor cash in lieu of
31 The Commission has stated that long-standing Commission guidelines have required open-end funds to hold no more than 15 of their net assets in illiquid securities and other illiquid assets See Investment Company Act Release No 28193 (March 11 2008) 73 FR 14618 (March 18 2008) footnote 34 See also Investment Company Act Release No 5847 (October 21 1969) 35 FR 19989 (December 31 1970) (Statement Regarding ldquoRestricted Securitiesrdquo) Investment Company Act Release No 18612 (March 12 1992) 57 FR 9828 (March 20 1992) (Revisions of Guidelines to Form N-1A) A fundrsquos portfolio security is illiquid if it cannot be disposed of in the ordinary course of business within seven days at approximately the value ascribed to it by the fund See Investment Company Act Release No 14983 (March 12 1986) 51 FR 9773 (March 21 1986) (adopting amendments to Rule 2a-7 under the 1940 Act) Investment Company Act Release No 17452 (April 23 1990) 55 FR 17933 (April 30 1990) (adopting Rule 144A under the Securities Act of 1933)
32 The NAV of the Fundrsquos Shares generally will be calculated once daily Monday through Friday as of the close of regular trading on the New York Stock Exchange generally 400 pm Eastern Time (the ldquoNAV Calculation Timerdquo) NAV per Share will be calculated by dividing the Fundrsquos net assets by the number of Fund Shares outstanding For more information regarding the valuation of Fund investments in calculating the Fundrsquos NAV see the Registration Statement
SR-NASDAQ-2015-011 Amendment No 2 Page 45 of 64
such instruments (the ldquoCreation Basketrdquo) In addition if there is a difference between the
NAV attributable to a Creation Unit and the market value of the Creation Basket
exchanged for the Creation Unit the party conveying instruments with the lower value
will pay to the other an amount in cash equal to the difference (referred to as the ldquoCash
Componentrdquo)
Creations and redemptions must be made by or through an Authorized Participant
that has executed an agreement that has been agreed to by the Distributor and BNY with
respect to creations and redemptions of Creation Units All standard orders to create
Creation Units must be received by the transfer agent no later than the closing time of the
regular trading session on the New York Stock Exchange (ordinarily 400 pm Eastern
Time) (the ldquoClosing Timerdquo) in each case on the date such order is placed in order for the
creation of Creation Units to be effected based on the NAV of Shares as next determined
on such date after receipt of the order in proper form Shares may be redeemed only in
Creation Units at their NAV next determined after receipt not later than the Closing Time
of a redemption request in proper form by the Fund through the transfer agent and only
on a business day
The Fundrsquos custodian through the National Securities Clearing Corporation will
make available on each business day prior to the opening of business of the Exchange
the list of the names and quantities of the instruments comprising the Creation Basket as
well as the estimated Cash Component (if any) for that day The published Creation
Basket will apply until a new Creation Basket is announced on the following business
day prior to commencement of trading in the Shares
SR-NASDAQ-2015-011 Amendment No 2 Page 46 of 64
Net Asset Value
The Fundrsquos NAV will be determined as of the close of trading (normally
400 pm Eastern Time) on each day the New York Stock Exchange is open for
business NAV will be calculated for the Fund by taking the market price of the Fundrsquos
total assets including interest or dividends accrued but not yet collected less all
liabilities and dividing such amount by the total number of Shares outstanding The
result rounded to the nearest cent will be the NAV per Share All valuations will be
subject to review by the Board of Trustees of the Trust (ldquoTrust Boardrdquo) or its delegate
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with valuation procedures (which may be revised from time to time) adopted by the Trust
Board (the ldquoValuation Proceduresrdquo) and in accordance with the 1940 Act A market
valuation generally means a valuation (i) obtained from an exchange an independent
pricing service (ldquoPricing Servicerdquo) or a major market maker (or dealer) or (ii) based on a
price quotation or other equivalent indication of value supplied by an exchange a Pricing
Service or a major market maker (or dealer) The information summarized below is
based on the Valuation Procedures as currently in effect however as noted above the
Valuation Procedures are amended from time to time and therefore such information is
subject to change
Certain securities including Floating Rate Debt Instruments in which the Fund
may invest will not be listed on any securities exchange or board of trade Such
securities will typically be bought and sold by institutional investors in individually
negotiated private transactions that function in many respects like an over-the-counter
SR-NASDAQ-2015-011 Amendment No 2 Page 47 of 64
secondary market although typically no formal market makers will exist Certain
securities particularly debt securities will have few or no trades or trade infrequently
and information regarding a specific security may not be widely available or may be
incomplete Accordingly determinations of the fair value of debt securities may be
based on infrequent and dated information Because there is less reliable objective data
available elements of judgment may play a greater role in valuation of debt securities
than for other types of securities Typically Floating Rate Debt Instruments and other
debt securities in which the Fund may invest (other than those described below) will be
valued using information provided by a Pricing Service Debt securities having a
remaining maturity of 60 days or less when purchased will be valued at cost adjusted for
amortization of premiums and accretion of discounts provided the Adviserrsquos pricing
committee (the ldquoPricing Committeerdquo) has determined that the use of amortized cost is an
appropriate reflection of fair value given market and issuer-specific conditions existing at
the time of the determination Overnight repurchase agreements will be valued at cost
and term repurchase agreements (ie those whose maturity exceeds seven days) will be
valued at the average of the bid quotations obtained daily from at least two recognized
dealers
Asset-backed and mortgage-backed securities will generally be valued by using a
Pricing Service If a Pricing Service does not cover a particular asset-backed or
mortgage-backed security or discontinues covering a particular asset-backed or
mortgage-backed security the security will be priced using broker quotes generally
provided by brokers that make or participate in markets in the security To derive values
Pricing Services and broker-dealers may use matrix pricing and valuation models as well
SR-NASDAQ-2015-011 Amendment No 2 Page 48 of 64
as recent market transactions for the same or similar assets As it deems appropriate the
Pricing Committee may determine that a Pricing Service price does not represent an
accurate value of an asset-backed or mortgage-backed security based on broker quotes it
receives a recent trade in the security by the Fund information from a portfolio manager
or other market information In the event that the Pricing Committee determines that the
Pricing Service price is unreliable or inaccurate based on such other information broker
quotes may be used Additionally if the Pricing Committee determines that the price of
an asset-backed or mortgage-backed security obtained from a Pricing Service and
available broker quotes is unreliable or inaccurate due to market conditions or other
reasons or if a Pricing Service price or broker quote is unavailable the security will be
valued using fair value pricing as described below
Equity securities listed on any exchange other than the Exchange will be valued at
the last sale price on the exchange on which they are principally traded on the business
day as of which such value is being determined Equity securities listed on the Exchange
will be valued at the official closing price on the business day as of which such value is
being determined If there has been no sale on such day or no official closing price in
the case of securities traded on the Exchange the securities will be valued using fair
value pricing as described below Equity securities traded on more than one securities
exchange will be valued at the last sale price or official closing price as applicable on
the business day as of which such value is being determined at the close of the exchange
representing the principal market for such securities
Exchange-traded options and futures contracts will be valued at the closing price
in the market where such contracts are principally traded
SR-NASDAQ-2015-011 Amendment No 2 Page 49 of 64
Certain securities including Floating Rate Debt Instruments in which the Fund
will invest will not be able to be priced by pre-established pricing methods Such
securities may be valued by the Trust Board or its delegate at fair value The use of fair
value pricing by the Fund will be governed by the Valuation Procedures and conducted in
accordance with the provisions of the 1940 Act Valuing the Fundrsquos securities using fair
value pricing will result in using prices for those securities that may differ from current
market valuations or official closing prices on the applicable exchange
Availability of Information
The Fundrsquos website (wwwftportfolioscom) which will be publicly available
prior to the public offering of Shares will include a form of the prospectus for the Fund
that may be downloaded The website will include the Sharesrsquo ticker CUSIP and
exchange information along with additional quantitative information updated on a daily
basis including for the Fund (1) daily trading volume the prior business dayrsquos reported
NAV and closing price mid-point of the bidask spread at the time of calculation of such
NAV (the ldquoBidAsk Pricerdquo)33 and a calculation of the premium and discount of the
BidAsk Price against the NAV and (2) data in chart format displaying the frequency
distribution of discounts and premiums of the daily BidAsk Price against the NAV
within appropriate ranges for each of the four previous calendar quarters On each
business day before commencement of trading in Shares in the Regular Market Session34
33 The BidAsk Price of the Fund will be determined using the mid-point of the highest bid and the lowest offer on the Exchange as of the time of calculation of the Fundrsquos NAV The records relating to BidAsk Prices will be retained by the Fund and its service providers
34 See Nasdaq Rule 4120(b)(4) (describing the three trading sessions on the Exchange (1) Pre-Market Session from 4 am to 930 am Eastern Time (2)
SR-NASDAQ-2015-011 Amendment No 2 Page 50 of 64
on the Exchange the Fund will disclose on its website the identities and quantities of the
portfolio of securities and other assets (the ldquoDisclosed Portfoliordquo as defined in Nasdaq
Rule 5735(c)(2)) held by the Fund that will form the basis for the Fundrsquos calculation of
NAV at the end of the business day 35 The Fundrsquos disclosure of derivative positions in
the Disclosed Portfolio will include information that market participants can use to value
these positions intraday On a daily basis the Fund will disclose on the Fundrsquos website
the following information regarding each portfolio holding as applicable to the type of
holding ticker symbol CUSIP number or other identifier if any a description of the
holding (including the type of holding) the identity of the security or other asset or
instrument underlying the holding if any for options the option strike price quantity
held (as measured by for example par value notional value or number of shares
contracts or units) maturity date if any coupon rate if any effective date if any market
value of the holding and percentage weighting of the holding in the Fundrsquos portfolio
The website information will be publicly available at no charge
In addition for the Fund an estimated value defined in Rule 5735(c)(3) as the
ldquoIntraday Indicative Valuerdquo that reflects an estimated intraday value of the Fundrsquos
Disclosed Portfolio will be disseminated Moreover the Intraday Indicative Value
Regular Market Session from 930 am to 4 pm or 415 pm Eastern Time and (3) Post-Market Session from 4 pm or 415 pm to 8 pm Eastern Time)
Under accounting procedures to be followed by the Fund trades made on the prior business day (ldquoTrdquo) will be booked and reflected in NAV on the current business day (ldquoT+1rdquo) Accordingly the Fund will be able to disclose at the beginning of the business day the portfolio that will form the basis for the NAV calculation at the end of the business day
35
SR-NASDAQ-2015-011 Amendment No 2 Page 51 of 64
available on the NASDAQ OMX Information LLC proprietary index data service36 will
be based upon the current value for the components of the Disclosed Portfolio and will be
updated and widely disseminated by one or more major market data vendors and broadly
displayed at least every 15 seconds during the Regular Market Session The Intraday
Indicative Value will be based on quotes and closing prices from the securitiesrsquo local
market and may not reflect events that occur subsequent to the local marketrsquos close
Premiums and discounts between the Intraday Indicative Value and the market price may
occur This should not be viewed as a ldquoreal timerdquo update of the NAV per Share of the
Fund which is calculated only once a day
The dissemination of the Intraday Indicative Value together with the Disclosed
Portfolio will allow investors to determine the value of the underlying portfolio of the
Fund on a daily basis and will provide a close estimate of that value throughout the
trading day
Investors will also be able to obtain the Fundrsquos Statement of Additional
Information (ldquoSAIrdquo) the Fundrsquos annual and semi-annual reports (together ldquoShareholder
Reportsrdquo) and its Form N-CSR and Form N-SAR filed twice a year The Fundrsquos SAI
and Shareholder Reports will be available free upon request from the Fund and those
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or
downloaded from the Commissionrsquos website at wwwsecgov Information regarding
Currently the NASDAQ OMX Global Index Data Service (ldquoGIDSrdquo) is the NASDAQ OMX global index data feed service offering real-time updates daily summary messages and access to widely followed indexes and Intraday Indicative Values for ETFs GIDS provides investment professionals with the daily information needed to track or trade NASDAQ OMX indexes listed ETFs or third-party partner indexes and ETFs
36
SR-NASDAQ-2015-011 Amendment No 2 Page 52 of 64
market price and trading volume of the Shares will be continually available on a real-time
basis throughout the day on brokersrsquo computer screens and other electronic services
Information regarding the previous dayrsquos closing price and trading volume information
for the Shares will be published daily in the financial section of newspapers Quotation
and last sale information for the Shares will be available via Nasdaq proprietary quote
and trade services as well as in accordance with the Unlisted Trading Privileges and the
Consolidated Tape Association (ldquoCTArdquo) plans for the Shares Quotation and last sale
information for the other ETFs in which the Fund will invest will be available via the
quote and trade services of their respective primary exchanges as well as in accordance
with the Unlisted Trading Privileges and the CTA plans as applicable Quotation and
last sale information for US exchange-traded options will be available via the Options
Price Reporting Authority Intraday executable price quotations on Floating Rate Debt
Instruments and other assets not traded on an exchange will be available from major
broker-dealer firms or market data vendors as well as from automated quotation systems
published or other public sources or online information services Additionally the Trade
Reporting and Compliance Engine (ldquoTRACErdquo) of the Financial Industry Regulatory
Authority (ldquoFINRArdquo) will be a source of price information for corporate bonds
privately-issued securities mortgage-backed securities and asset-backed securities to the
extent transactions in such securities are reported to TRACE37 For exchange-traded
Broker-dealers that are FINRA member firms have an obligation to report transactions in specified debt securities to TRACE to the extent required under applicable FINRA rules Generally such debt securities will have at issuance a maturity that exceeds one calendar year
37
SR-NASDAQ-2015-011 Amendment No 2 Page 53 of 64
assets intraday pricing information will be available directly from the applicable listing
exchange
Additional information regarding the Fund and the Shares including investment
strategies risks creation and redemption procedures fees Fund holdings disclosure
policies distributions and taxes will be included in the Registration Statement
Initial and Continued Listing
The Shares will be subject to Rule 5735 which sets forth the initial and continued
listing criteria applicable to Managed Fund Shares The Exchange represents that for
initial andor continued listing the Fund must be in compliance with Rule 10A-338 under
the Act A minimum of 100000 Shares will be outstanding at the commencement of
trading on the Exchange The Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the NAV and the
Disclosed Portfolio will be made available to all market participants at the same time
Trading Halts
With respect to trading halts the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading in the Shares of the Fund Nasdaq will
halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12) Trading may be
halted because of market conditions or for reasons that in the view of the Exchange
make trading in the Shares inadvisable These may include (1) the extent to which
trading is not occurring in the securities andor the other assets constituting the Disclosed
Portfolio of the Fund or (2) whether other unusual conditions or circumstances
See 17 CFR 24010A-3 38
SR-NASDAQ-2015-011 Amendment No 2 Page 54 of 64
detrimental to the maintenance of a fair and orderly market are present Trading in the
Shares also will be subject to Rule 5735(d)(2)(D) which sets forth circumstances under
which Shares of the Fund may be halted
Trading Rules
Nasdaq deems the Shares to be equity securities thus rendering trading in the
Shares subject to Nasdaqrsquos existing rules governing the trading of equity securities
Nasdaq will allow trading in the Shares from 400 am until 800 pm Eastern Time
The Exchange has appropriate rules to facilitate transactions in the Shares during all
trading sessions As provided in Nasdaq Rule 5735(b)(3) the minimum price variation
for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $001
Surveillance
The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws39 The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities laws
The surveillances referred to above generally focus on detecting securities trading
outside their normal patterns which could be indicative of manipulative or other violative
activity When such situations are detected surveillance analysis follows and
FINRA surveils trading on the Exchange pursuant to a regulatory services agreement The Exchange is responsible for FINRArsquos performance under this regulatory services agreement
39
SR-NASDAQ-2015-011 Amendment No 2 Page 55 of 64
investigations are opened where appropriate to review the behavior of all relevant
parties for all relevant trading violations
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 56 of 64
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
SR-NASDAQ-2015-011 Amendment No 2 Page 57 of 64
2 Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
SR-NASDAQ-2015-011 Amendment No 2 Page 58 of 64
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
SR-NASDAQ-2015-011 Amendment No 2 Page 59 of 64
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
SR-NASDAQ-2015-011 Amendment No 2 Page 60 of 64
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 61 of 64
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
SR-NASDAQ-2015-011 Amendment No 2 Page 62 of 64
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
B Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
C Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received From Members Participants or Others
Written comments were neither solicited nor received
III Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Within 45 days of the date of publication of this notice in the Federal Register or
within such longer period (i) as the Commission may designate up to 90 days of such date
if it finds such longer period to be appropriate and publishes its reasons for so finding or
(ii) as to which the Exchange consents the Commission shall (a) by order approve or
disapprove such proposed rule change or (b) institute proceedings to determine whether
the proposed rule change should be disapproved
SR-NASDAQ-2015-011 Amendment No 2 Page 63 of 64
IV Solicitation of Comments
Interested persons are invited to submit written data views and arguments
concerning the foregoing including whether the proposed rule change is consistent with
the Act Comments may be submitted by any of the following methods
Electronic comments
bull Use the Commissionrsquos Internet comment form
(httpwwwsecgovrulessroshtml) or
bull Send an e-mail to rule-commentssecgov Please include File Number
SR-NASDAQ-2015-011 on the subject line
Paper comments
bull Send paper comments in triplicate to Brent J Fields Secretary Securities and
Exchange Commission Station Place 100 F Street NE Washington DC
20549-9303
All submissions should refer to File Number SR-NASDAQ-2015-011 This file number
should be included on the subject line if e-mail is used To help the Commission process
and review your comments more efficiently please use only one method The
Commission will post all comments on the Commissionrsquos Internet website
httpwwwsecgovrulessroshtml
Copies of the submission all subsequent amendments all written statements with
respect to the proposed rule change that are filed with the Commission and all written
communications relating to the proposed rule change between the Commission and any
person other than those that may be withheld from the public in accordance with the
provisions of 5 USC 552 will be available for website viewing and printing in the
Commissionrsquos Public Reference Room 100 F Street NE Washington DC 20549 on
SR-NASDAQ-2015-011 Amendment No 2 Page 64 of 64
official business days between the hours of 1000 am and 300 pm Copies of the filing
also will be available for inspection and copying at the principal office of Nasdaq All
comments received will be posted without change the Commission does not edit
personal identifying information from submissions You should submit only information
that you wish to make available publicly
All submissions should refer to File Number SR-NASDAQ-2015-011 and should
be submitted on or before [insert date 21 days from publication in the Federal Register]
For the Commission by the Division of Trading and Markets pursuant to
delegated authority41
Kevin M OrsquoNeill Deputy Secretary
17 CFR 20030-3(a)(12) 41
7
SR-NASDAQ-2015-011 Amendment No 2 Page 5 of 64
intends to qualify each year as a regulated investment company (ldquoRICrdquo) under
Subchapter M of the Internal Revenue Code of 1986 as amended
First Trust Advisors LP will be the investment adviser (ldquoAdviserrdquo) to the Fund
First Trust Portfolios LP (the ldquoDistributorrdquo) will be the principal underwriter and
distributor of the Fundrsquos Shares The Bank of New York Mellon Corporation (ldquoBNYrdquo)
will act as the administrator accounting agent custodian and transfer agent to the Fund
Paragraph (g) of Rule 5735 provides that if the investment adviser to the
investment company issuing Managed Fund Shares is affiliated with a broker-dealer
such investment adviser shall erect a ldquofire wallrdquo between the investment adviser and the
broker-dealer with respect to access to information concerning the composition andor
changes to such investment company portfolio7 In addition paragraph (g) further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio Rule 5735(g) is similar
An investment adviser to an open-end fund is required to be registered under the Investment Advisers Act of 1940 (the ldquoAdvisers Actrdquo) As a result the Adviser and its related personnel are subject to the provisions of Rule 204A-1 under the Advisers Act relating to codes of ethics This Rule requires investment advisers to adopt a code of ethics that reflects the fiduciary nature of the relationship to clients as well as compliance with other applicable securities laws Accordingly procedures designed to prevent the communication and misuse of non-public information by an investment adviser must be consistent with Rule 204A-1 under the Advisers Act In addition Rule 206(4)-7 under the Advisers Act makes it unlawful for an investment adviser to provide investment advice to clients unless such investment adviser has (i) adopted and implemented written policies and procedures reasonably designed to prevent violation by the investment adviser and its supervised persons of the Advisers Act and the Commission rules adopted thereunder (ii) implemented at a minimum an annual review regarding the adequacy of the policies and procedures established pursuant to subparagraph (i) above and the effectiveness of their implementation and (iii) designated an individual (who is a supervised person) responsible for administering the policies and procedures adopted under subparagraph (i) above
SR-NASDAQ-2015-011 Amendment No 2 Page 6 of 64
to Nasdaq Rule 5705(b)(5)(A)(i) however paragraph (g) in connection with the
establishment of a ldquofire wallrdquo between the investment adviser and the broker-dealer
reflects the applicable open-end fundrsquos portfolio not an underlying benchmark index as
is the case with index-based funds The Adviser is not a broker-dealer although it is
affiliated with the Distributor a broker-dealer The Adviser has implemented a fire wall
with respect to its broker-dealer affiliate regarding access to information concerning the
composition andor changes to the portfolio In addition personnel who make decisions
on the Fundrsquos portfolio composition will be subject to procedures designed to prevent the
use and dissemination of material non-public information regarding the Fundrsquos portfolio
In the event (a) the Adviser becomes or becomes newly affiliated with a broker-dealer
or (b) any new adviser or sub-adviser is a registered broker-dealer or becomes affiliated
with another broker-dealer it will implement a fire wall with respect to its relevant
personnel andor such broker-dealer affiliate as applicable regarding access to
information concerning the composition andor changes to the portfolio and will be
subject to procedures designed to prevent the use and dissemination of material
non-public information regarding such portfolio The Fund does not currently intend to
use a sub-adviser
First Trust Strategic Floating Rate ETF
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions8 at least 80 of its
The term ldquounder normal market conditionsrdquo as used herein includes but is not limited to the absence of adverse market economic political or other conditions including extreme volatility or trading halts in the fixed income markets or the financial markets generally operational issues causing dissemination of inaccurate market information or force majeure type events such as systems
8
SR-NASDAQ-2015-011 Amendment No 2 Page 7 of 64
net assets in a portfolio of the following types of floating-rate9 debt instruments issued by
US and non-US public- and private-sector entities floating-rate corporate10 and
government bonds and notes floating-rate agency securities 11 floating-rate instruments
of non-US issuers floating-rate privately-issued securities 12 floating-rate asset-backed
failure natural or man-made disaster act of God armed conflict act of terrorism riot or labor disruption or any similar intervening circumstance For temporary defensive purposes during the initial invest-up period and during periods of high cash inflows or outflows the Fund may depart from its principal investment strategies for example it may hold a higher than normal proportion of its assets in cash During such periods the Fund may not be able to achieve its investment objective The Fund may adopt a defensive strategy when the Adviser believes securities in which the Fund normally invests have elevated risks due to political or economic factors and in other extraordinary circumstances
9 For the avoidance of doubt the term ldquofloating-raterdquo shall also include similar terms such as ldquovariable-raterdquo and ldquoadjustable-raterdquo
10 The Adviser expects that under normal market conditions generally for a corporate bond to be considered as an eligible investment after taking into account such an investment at least 75 of the Fundrsquos net assets that are invested in floating-rate corporate bonds and as described below fixed-rate corporate bonds (in the aggregate) will be comprised of corporate bonds that have at the time of original issuance $100 million or more par amount outstanding
11 ldquoAgency securitiesrdquo for these purposes generally includes securities issued by the following entities Government National Mortgage Association (Ginnie Mae) Federal National Mortgage Association (Fannie Mae) Federal Home Loan Banks (FHLBanks) Federal Home Loan Mortgage Corporation (Freddie Mac) Farm Credit System (FCS) Farm Credit Banks (FCBanks) Student Loan Marketing Association (Sallie Mae) Resolution Funding Corporation (REFCORP) Financing Corporation (FICO) and the Farm Credit System (FCS) Financial Assistance Corporation (FAC) Agency securities can include but are not limited to mortgage-backed securities
12 ldquoPrivately-issued securitiesrdquo for these purposes generally includes Rule 144A securities other than mortgage-backed Rule 144A securities Under normal market conditions privately-issued securities will have at the time of original issuance $100 million or more principal amount outstanding to be considered eligible investments
SR-NASDAQ-2015-011 Amendment No 2 Page 8 of 64
securities 13 floating-rate mortgage-backed securities14 floating-rate loans 15 and
investment companies16 (including investment companies advised by the Adviser) that
13 Asset-backed securities are securities that are backed by a pool of assets The Fund currently intends to invest in asset-backed securities that are consumer asset-backed securities
14 Mortgage-backed securities which are securities that directly or indirectly represent a participation in or are secured by and payable from mortgage loans on real property will consist of (1) residential mortgage-backed securities (ldquoRMBSrdquo) (2) commercial mortgage-backed securities (ldquoCMBSrdquo) (3) stripped mortgage-backed securities (ldquoSMBSrdquo) which are mortgage-backed securities where mortgage payments are divided between paying the loanrsquos principal and paying the loanrsquos interest (4) collateralized mortgage obligations (ldquoCMOsrdquo) and real estate mortgage investment conduits (ldquoREMICsrdquo) which are mortgage-backed securities that are divided into multiple classes with each class being entitled to a different share of the principal and interest payments received from the pool of underlying assets
15 The floating-rate loans in which the Fund will invest will represent amounts borrowed by companies or other entities from banks and other lenders and a significant portion of such floating-rate loans may be rated below investment grade or unrated Floating-rate loans held by the Fund may be senior or subordinate obligations of the borrower and may or may not be secured by collateral First lien senior secured floating-rate loans are referred to herein as ldquosenior loansrdquo Floating-rate loans that are not senior loans (ie unsecured floating-rate loans and secured floating-rate loans that are not first lien floating-rate loans) are referred to herein as ldquojunior loansrdquo The Fund will generally invest in floating-rate loans that the Adviser deems to be liquid with readily available prices notwithstanding the foregoing the Fund may invest in floating-rate loans that are deemed illiquid so long as the Fund complies with the 15 limitation on investments of its net assets in illiquid assets described below under ldquoInvestment Restrictionsrdquo
16 The Fund currently anticipates investing only in registered open-end investment companies that are listed and traded in the US on registered exchanges (ie other ETFs) An ETF is an investment company registered under the 1940 Act that holds a portfolio of securities Many ETFs are designed to track the performance of a securities index including industry sector country and region indexes The Fund may invest in the securities of ETFs in excess of the limits imposed under the 1940 Act pursuant to exemptive orders obtained by other ETFs and their sponsors from the Commission In addition the Fund may invest in the securities of certain investment companies in excess of the limits imposed under the 1940 Act pursuant to an exemptive order obtained by the Trust and the Adviser from the Commission See Investment Company Act Release No 30377
SR-NASDAQ-2015-011 Amendment No 2 Page 9 of 64
invest primarily in the foregoing types of debt instruments17 (collectively ldquoFloating Rate
Debt Instrumentsrdquo)
At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade To be considered
ldquoinvestment graderdquo under normal market conditions rated Floating Rate Debt
Instruments will carry at the time of purchase a rating in the highest four rating
categories of at least one nationally recognized statistical ratings organization
(ldquoNRSROrdquo) (eg BBB- or higher by Standard amp Poorrsquos Ratings Services (ldquoSampPrdquo)
andor Fitch Ratings (ldquoFitchrdquo) or Baa3 or higher by Moodyrsquos Investors Service Inc
(ldquoMoodyrsquosrdquo)18 For unrated securities to be considered ldquoinvestment graderdquo under normal
market conditions such securities will be determined at the time of purchase to be of
comparable quality19 by the Adviser The Fund may invest up to 35 of its net assets in
(February 5 2013) (File No 812-13895) The ETFs in which the Fund may invest include Index Fund Shares (as described in Nasdaq Rule 5705) Portfolio Depository Receipts (as described in Nasdaq Rule 5705) and Managed Fund Shares (as described in Nasdaq Rule 5735) While the Fund may invest in inverse ETFs the Fund will not invest in leveraged or inverse leveraged (eg 2X or -3X) ETFs
17 The liquidity of a security especially in the case of asset-backed and mortgage-backed securities will be a substantial factor in the Fundrsquos security selection process Consistent with the discussion below under ldquoInvestment Restrictionsrdquo the Fund will not purchase any Floating Rate Debt Instruments (including asset-backed securities and mortgage-backed securities) that in the Adviserrsquos opinion are illiquid if as a result more than 15 of the value of the Fundrsquos net assets will be invested in illiquid assets
18 For the avoidance of doubt if a security is rated by multiple NRSROs and receives different ratings the Fund will treat the security as being rated in the highest rating category received from an NRSRO
19 Comparable quality of unrated securities will be determined by the Adviser based on fundamental credit analysis of the unrated security and comparable NRSRO-rated securities On a best efforts basis the Adviser will attempt to make a rating
SR-NASDAQ-2015-011 Amendment No 2 Page 10 of 64
securities that are at the time of investment rated below investment grade by each
NRSRO rating such securities (or securities that are unrated and determined by the
Adviser to be of comparable quality) commonly referred to as ldquohigh yieldrdquo or ldquojunkrdquo
bonds If subsequent to purchase by the Fund a security held by the Fund experiences a
decline in credit quality and falls below investment grade the Fund may continue to hold
the security and it will not cause the Fund to violate the 35 investment limitation
however the security will be taken into account for purposes of determining whether
purchases of additional securities will cause the Fund to violate such limitation
The Fund will limit its investments in asset-backed securities (excluding agency
mortgage-backed securities) and non-agency mortgage-backed securities (in the
aggregate) to 20 of its net assets20 In addition the Fund will limit its investments in
junior loans to 20 of its net assets
The Fund will hold debt securities (including in the aggregate Floating Rate
Debt Instruments and the fixed-rate debt securities described below) of at least 13
non-affiliated issuers
Other Investments
Under normal market conditions the Fund will invest primarily in the Floating
Rate Debt Instruments described above to meet its investment objective In addition the
determination based on publicly available data In making a ldquocomparable qualityrdquo determination the Adviser may consider for example whether the issuer of the security has issued other rated securities the nature and provisions of the relevant security whether the obligations under the relevant security are guaranteed by another entity and the rating of such guarantor (if any) relevant cash flows macroeconomic analysis andor sector or industry analysis
For the avoidance of doubt there is no limitation on the Fundrsquos investments in agency mortgage-backed securities
20
SR-NASDAQ-2015-011 Amendment No 2 Page 11 of 64
Fund may invest up to 20 of its net assets in the following types of fixed-rate debt
securities corporate21 and government bonds and notes agency securities22 instruments
of non-US issuers in developed markets privately-issued securities 23 asset-backed
securities 24 mortgage-backed securities 25 municipal bonds money market securities26
and investment companies27 (including investment companies advised by the Adviser)
that invest primarily in the foregoing types of debt securities
Further to pursue its investment objective the Fund may invest up to 20 of the
value of its net assets in exchange-listed options on US Treasury futures contracts and
exchange-listed US Treasury futures contracts28 The use of these derivative
transactions may allow the Fund to obtain net long or short exposures to selected interest
rates These derivatives may also be used to hedge risks including interest rate risks and
21 See footnote 10 above
22 See footnote 11 above
23 See footnote 12 above
24 See footnote 13 above
25 See footnote 14 above
26 ldquoMoney market securitiesrdquo for these purposes generally includes short-term high-quality obligations issued or guaranteed by the US Treasury or the agencies or instrumentalities of the US government short-term high-quality securities issued or guaranteed by non-US governments agencies and instrumentalities repurchase agreements commercial paper (both asset-backed and non-assetshybacked) and deposits and other obligations of US and non-US banks and financial institutions
27 See footnote 16 above
28 At least 90 of the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be invested in instruments that trade in markets that are members of the Intermarket Surveillance Group (ldquoISGrdquo) (see footnote 40 below) or are parties to a comprehensive surveillance sharing agreement with the Exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 12 of 64
credit risks associated with the Fundrsquos portfolio investments The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index
Investment Restrictions
The Fund will not invest 25 or more of the value of its total assets in securities
of issuers in any one industry This restriction does not apply to (a) obligations issued or
guaranteed by the US government its agencies or instrumentalities or (b) securities of
other investment companies29
The Fund may hold up to an aggregate amount of 15 of its net assets in illiquid
assets (calculated at the time of investment) including Rule 144A securities deemed
illiquid by the Adviser30 The Fund will monitor its portfolio liquidity on an ongoing
basis to determine whether in light of current circumstances an adequate level of
liquidity is being maintained and will consider taking appropriate steps in order to
maintain adequate liquidity if through a change in values net assets or other
circumstances more than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid
assets include securities subject to contractual or other restrictions on resale and other
29 See Form N-1A Item 9 The Commission has taken the position that a fund is concentrated if it invests more than 25 of the value of its total assets in any one industry See eg Investment Company Act Release No 9011 (October 30 1975) 40 FR 54241 (November 21 1975)
30 In reaching liquidity decisions the Adviser may consider the following factors the frequency of trades and quotes for the security the number of dealers wishing to purchase or sell the security and the number of other potential purchasers dealer undertakings to make a market in the security and the nature of the security and the nature of the marketplace in which it trades (eg the time needed to dispose of the security the method of soliciting offers and the mechanics of transfer)
SR-NASDAQ-2015-011 Amendment No 2 Page 13 of 64
instruments that lack readily available markets as determined in accordance with
Commission staff guidance31
The Fund will not invest in non-US equity securities
Creation and Redemption of Shares
The Fund will issue and redeem Shares on a continuous basis at net asset value
(ldquoNAVrdquo)32 only in large blocks of Shares (ldquoCreation Unitsrdquo) in transactions with
authorized participants generally including broker-dealers and large institutional
investors (ldquoAuthorized Participantsrdquo) Creation Units generally will consist of 50000
Shares although this may change from time to time Creation Units however are not
expected to consist of less than 50000 Shares As described in the Registration
Statement and consistent with the Exemptive Relief the Fund will issue and redeem
Creation Units in exchange for an in-kind portfolio of instruments andor cash in lieu of
31 The Commission has stated that long-standing Commission guidelines have required open-end funds to hold no more than 15 of their net assets in illiquid securities and other illiquid assets See Investment Company Act Release No 28193 (March 11 2008) 73 FR 14618 (March 18 2008) footnote 34 See also Investment Company Act Release No 5847 (October 21 1969) 35 FR 19989 (December 31 1970) (Statement Regarding ldquoRestricted Securitiesrdquo) Investment Company Act Release No 18612 (March 12 1992) 57 FR 9828 (March 20 1992) (Revisions of Guidelines to Form N-1A) A fundrsquos portfolio security is illiquid if it cannot be disposed of in the ordinary course of business within seven days at approximately the value ascribed to it by the fund See Investment Company Act Release No 14983 (March 12 1986) 51 FR 9773 (March 21 1986) (adopting amendments to Rule 2a-7 under the 1940 Act) Investment Company Act Release No 17452 (April 23 1990) 55 FR 17933 (April 30 1990) (adopting Rule 144A under the Securities Act of 1933)
32 The NAV of the Fundrsquos Shares generally will be calculated once daily Monday through Friday as of the close of regular trading on the New York Stock Exchange generally 400 pm Eastern Time (the ldquoNAV Calculation Timerdquo) NAV per Share will be calculated by dividing the Fundrsquos net assets by the number of Fund Shares outstanding For more information regarding the valuation of Fund investments in calculating the Fundrsquos NAV see the Registration Statement
SR-NASDAQ-2015-011 Amendment No 2 Page 14 of 64
such instruments (the ldquoCreation Basketrdquo) In addition if there is a difference between the
NAV attributable to a Creation Unit and the market value of the Creation Basket
exchanged for the Creation Unit the party conveying instruments with the lower value
will pay to the other an amount in cash equal to the difference (referred to as the ldquoCash
Componentrdquo)
Creations and redemptions must be made by or through an Authorized Participant
that has executed an agreement that has been agreed to by the Distributor and BNY with
respect to creations and redemptions of Creation Units All standard orders to create
Creation Units must be received by the transfer agent no later than the closing time of the
regular trading session on the New York Stock Exchange (ordinarily 400 pm Eastern
Time) (the ldquoClosing Timerdquo) in each case on the date such order is placed in order for the
creation of Creation Units to be effected based on the NAV of Shares as next determined
on such date after receipt of the order in proper form Shares may be redeemed only in
Creation Units at their NAV next determined after receipt not later than the Closing Time
of a redemption request in proper form by the Fund through the transfer agent and only
on a business day
The Fundrsquos custodian through the National Securities Clearing Corporation will
make available on each business day prior to the opening of business of the Exchange
the list of the names and quantities of the instruments comprising the Creation Basket as
well as the estimated Cash Component (if any) for that day The published Creation
Basket will apply until a new Creation Basket is announced on the following business
day prior to commencement of trading in the Shares
SR-NASDAQ-2015-011 Amendment No 2 Page 15 of 64
Net Asset Value
The Fundrsquos NAV will be determined as of the close of trading (normally
400 pm Eastern Time) on each day the New York Stock Exchange is open for
business NAV will be calculated for the Fund by taking the market price of the Fundrsquos
total assets including interest or dividends accrued but not yet collected less all
liabilities and dividing such amount by the total number of Shares outstanding The
result rounded to the nearest cent will be the NAV per Share All valuations will be
subject to review by the Board of Trustees of the Trust (ldquoTrust Boardrdquo) or its delegate
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with valuation procedures (which may be revised from time to time) adopted by the Trust
Board (the ldquoValuation Proceduresrdquo) and in accordance with the 1940 Act A market
valuation generally means a valuation (i) obtained from an exchange an independent
pricing service (ldquoPricing Servicerdquo) or a major market maker (or dealer) or (ii) based on a
price quotation or other equivalent indication of value supplied by an exchange a Pricing
Service or a major market maker (or dealer) The information summarized below is
based on the Valuation Procedures as currently in effect however as noted above the
Valuation Procedures are amended from time to time and therefore such information is
subject to change
Certain securities including Floating Rate Debt Instruments in which the Fund
may invest will not be listed on any securities exchange or board of trade Such
securities will typically be bought and sold by institutional investors in individually
negotiated private transactions that function in many respects like an over-the-counter
SR-NASDAQ-2015-011 Amendment No 2 Page 16 of 64
secondary market although typically no formal market makers will exist Certain
securities particularly debt securities will have few or no trades or trade infrequently
and information regarding a specific security may not be widely available or may be
incomplete Accordingly determinations of the fair value of debt securities may be
based on infrequent and dated information Because there is less reliable objective data
available elements of judgment may play a greater role in valuation of debt securities
than for other types of securities Typically Floating Rate Debt Instruments and other
debt securities in which the Fund may invest (other than those described below) will be
valued using information provided by a Pricing Service Debt securities having a
remaining maturity of 60 days or less when purchased will be valued at cost adjusted for
amortization of premiums and accretion of discounts provided the Adviserrsquos pricing
committee (the ldquoPricing Committeerdquo) has determined that the use of amortized cost is an
appropriate reflection of fair value given market and issuer-specific conditions existing at
the time of the determination Overnight repurchase agreements will be valued at cost
and term repurchase agreements (ie those whose maturity exceeds seven days) will be
valued at the average of the bid quotations obtained daily from at least two recognized
dealers
Asset-backed and mortgage-backed securities will generally be valued by using a
Pricing Service If a Pricing Service does not cover a particular asset-backed or
mortgage-backed security or discontinues covering a particular asset-backed or
mortgage-backed security the security will be priced using broker quotes generally
provided by brokers that make or participate in markets in the security To derive values
Pricing Services and broker-dealers may use matrix pricing and valuation models as well
SR-NASDAQ-2015-011 Amendment No 2 Page 17 of 64
as recent market transactions for the same or similar assets As it deems appropriate the
Pricing Committee may determine that a Pricing Service price does not represent an
accurate value of an asset-backed or mortgage-backed security based on broker quotes it
receives a recent trade in the security by the Fund information from a portfolio manager
or other market information In the event that the Pricing Committee determines that the
Pricing Service price is unreliable or inaccurate based on such other information broker
quotes may be used Additionally if the Pricing Committee determines that the price of
an asset-backed or mortgage-backed security obtained from a Pricing Service and
available broker quotes is unreliable or inaccurate due to market conditions or other
reasons or if a Pricing Service price or broker quote is unavailable the security will be
valued using fair value pricing as described below
Equity securities listed on any exchange other than the Exchange will be valued at
the last sale price on the exchange on which they are principally traded on the business
day as of which such value is being determined Equity securities listed on the Exchange
will be valued at the official closing price on the business day as of which such value is
being determined If there has been no sale on such day or no official closing price in
the case of securities traded on the Exchange the securities will be valued using fair
value pricing as described below Equity securities traded on more than one securities
exchange will be valued at the last sale price or official closing price as applicable on
the business day as of which such value is being determined at the close of the exchange
representing the principal market for such securities
Exchange-traded options and futures contracts will be valued at the closing price
in the market where such contracts are principally traded
SR-NASDAQ-2015-011 Amendment No 2 Page 18 of 64
Certain securities including Floating Rate Debt Instruments in which the Fund
will invest will not be able to be priced by pre-established pricing methods Such
securities may be valued by the Trust Board or its delegate at fair value The use of fair
value pricing by the Fund will be governed by the Valuation Procedures and conducted in
accordance with the provisions of the 1940 Act Valuing the Fundrsquos securities using fair
value pricing will result in using prices for those securities that may differ from current
market valuations or official closing prices on the applicable exchange
Availability of Information
The Fundrsquos website (wwwftportfolioscom) which will be publicly available
prior to the public offering of Shares will include a form of the prospectus for the Fund
that may be downloaded The website will include the Sharesrsquo ticker CUSIP and
exchange information along with additional quantitative information updated on a daily
basis including for the Fund (1) daily trading volume the prior business dayrsquos reported
NAV and closing price mid-point of the bidask spread at the time of calculation of such
NAV (the ldquoBidAsk Pricerdquo)33 and a calculation of the premium and discount of the
BidAsk Price against the NAV and (2) data in chart format displaying the frequency
distribution of discounts and premiums of the daily BidAsk Price against the NAV
within appropriate ranges for each of the four previous calendar quarters On each
business day before commencement of trading in Shares in the Regular Market Session34
33 The BidAsk Price of the Fund will be determined using the mid-point of the highest bid and the lowest offer on the Exchange as of the time of calculation of the Fundrsquos NAV The records relating to BidAsk Prices will be retained by the Fund and its service providers
34 See Nasdaq Rule 4120(b)(4) (describing the three trading sessions on the Exchange (1) Pre-Market Session from 4 am to 930 am Eastern Time (2)
SR-NASDAQ-2015-011 Amendment No 2 Page 19 of 64
on the Exchange the Fund will disclose on its website the identities and quantities of the
portfolio of securities and other assets (the ldquoDisclosed Portfoliordquo as defined in Nasdaq
Rule 5735(c)(2)) held by the Fund that will form the basis for the Fundrsquos calculation of
NAV at the end of the business day 35 The Fundrsquos disclosure of derivative positions in
the Disclosed Portfolio will include information that market participants can use to value
these positions intraday On a daily basis the Fund will disclose on the Fundrsquos website
the following information regarding each portfolio holding as applicable to the type of
holding ticker symbol CUSIP number or other identifier if any a description of the
holding (including the type of holding) the identity of the security or other asset or
instrument underlying the holding if any for options the option strike price quantity
held (as measured by for example par value notional value or number of shares
contracts or units) maturity date if any coupon rate if any effective date if any market
value of the holding and percentage weighting of the holding in the Fundrsquos portfolio
The website information will be publicly available at no charge
In addition for the Fund an estimated value defined in Rule 5735(c)(3) as the
ldquoIntraday Indicative Valuerdquo that reflects an estimated intraday value of the Fundrsquos
Disclosed Portfolio will be disseminated Moreover the Intraday Indicative Value
Regular Market Session from 930 am to 4 pm or 415 pm Eastern Time and (3) Post-Market Session from 4 pm or 415 pm to 8 pm Eastern Time)
Under accounting procedures to be followed by the Fund trades made on the prior business day (ldquoTrdquo) will be booked and reflected in NAV on the current business day (ldquoT+1rdquo) Accordingly the Fund will be able to disclose at the beginning of the business day the portfolio that will form the basis for the NAV calculation at the end of the business day
35
SR-NASDAQ-2015-011 Amendment No 2 Page 20 of 64
available on the NASDAQ OMX Information LLC proprietary index data service36 will
be based upon the current value for the components of the Disclosed Portfolio and will be
updated and widely disseminated by one or more major market data vendors and broadly
displayed at least every 15 seconds during the Regular Market Session The Intraday
Indicative Value will be based on quotes and closing prices from the securitiesrsquo local
market and may not reflect events that occur subsequent to the local marketrsquos close
Premiums and discounts between the Intraday Indicative Value and the market price may
occur This should not be viewed as a ldquoreal timerdquo update of the NAV per Share of the
Fund which is calculated only once a day
The dissemination of the Intraday Indicative Value together with the Disclosed
Portfolio will allow investors to determine the value of the underlying portfolio of the
Fund on a daily basis and will provide a close estimate of that value throughout the
trading day
Investors will also be able to obtain the Fundrsquos Statement of Additional
Information (ldquoSAIrdquo) the Fundrsquos annual and semi-annual reports (together ldquoShareholder
Reportsrdquo) and its Form N-CSR and Form N-SAR filed twice a year The Fundrsquos SAI
and Shareholder Reports will be available free upon request from the Fund and those
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or
downloaded from the Commissionrsquos website at wwwsecgov Information regarding
market price and trading volume of the Shares will be continually available on a real-time
Currently the NASDAQ OMX Global Index Data Service (ldquoGIDSrdquo) is the NASDAQ OMX global index data feed service offering real-time updates daily summary messages and access to widely followed indexes and Intraday Indicative Values for ETFs GIDS provides investment professionals with the daily information needed to track or trade NASDAQ OMX indexes listed ETFs or third-party partner indexes and ETFs
36
SR-NASDAQ-2015-011 Amendment No 2 Page 21 of 64
basis throughout the day on brokersrsquo computer screens and other electronic services
Information regarding the previous dayrsquos closing price and trading volume information
for the Shares will be published daily in the financial section of newspapers Quotation
and last sale information for the Shares will be available via Nasdaq proprietary quote
and trade services as well as in accordance with the Unlisted Trading Privileges and the
Consolidated Tape Association (ldquoCTArdquo) plans for the Shares Quotation and last sale
information for the other ETFs in which the Fund will invest will be available via the
quote and trade services of their respective primary exchanges as well as in accordance
with the Unlisted Trading Privileges and the CTA plans as applicable Quotation and
last sale information for US exchange-traded options will be available via the Options
Price Reporting Authority Intraday executable price quotations on Floating Rate Debt
Instruments and other assets not traded on an exchange will be available from major
broker-dealer firms or market data vendors as well as from automated quotation systems
published or other public sources or online information services Additionally the Trade
Reporting and Compliance Engine (ldquoTRACErdquo) of the Financial Industry Regulatory
Authority (ldquoFINRArdquo) will be a source of price information for corporate bonds
privately-issued securities mortgage-backed securities and asset-backed securities to the
extent transactions in such securities are reported to TRACE37 For exchange-traded
assets intraday pricing information will be available directly from the applicable listing
exchange
Broker-dealers that are FINRA member firms have an obligation to report transactions in specified debt securities to TRACE to the extent required under applicable FINRA rules Generally such debt securities will have at issuance a maturity that exceeds one calendar year
37
SR-NASDAQ-2015-011 Amendment No 2 Page 22 of 64
Additional information regarding the Fund and the Shares including investment
strategies risks creation and redemption procedures fees Fund holdings disclosure
policies distributions and taxes will be included in the Registration Statement
Initial and Continued Listing
The Shares will be subject to Rule 5735 which sets forth the initial and continued
listing criteria applicable to Managed Fund Shares The Exchange represents that for
initial andor continued listing the Fund must be in compliance with Rule 10A-338 under
the Act A minimum of 100000 Shares will be outstanding at the commencement of
trading on the Exchange The Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the NAV and the
Disclosed Portfolio will be made available to all market participants at the same time
Trading Halts
With respect to trading halts the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading in the Shares of the Fund Nasdaq will
halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12) Trading may be
halted because of market conditions or for reasons that in the view of the Exchange
make trading in the Shares inadvisable These may include (1) the extent to which
trading is not occurring in the securities andor the other assets constituting the Disclosed
Portfolio of the Fund or (2) whether other unusual conditions or circumstances
detrimental to the maintenance of a fair and orderly market are present Trading in the
See 17 CFR 24010A-3 38
SR-NASDAQ-2015-011 Amendment No 2 Page 23 of 64
Shares also will be subject to Rule 5735(d)(2)(D) which sets forth circumstances under
which Shares of the Fund may be halted
Trading Rules
Nasdaq deems the Shares to be equity securities thus rendering trading in the
Shares subject to Nasdaqrsquos existing rules governing the trading of equity securities
Nasdaq will allow trading in the Shares from 400 am until 800 pm Eastern Time
The Exchange has appropriate rules to facilitate transactions in the Shares during all
trading sessions As provided in Nasdaq Rule 5735(b)(3) the minimum price variation
for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $001
Surveillance
The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws39 The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities laws
The surveillances referred to above generally focus on detecting securities trading
outside their normal patterns which could be indicative of manipulative or other violative
activity When such situations are detected surveillance analysis follows and
investigations are opened where appropriate to review the behavior of all relevant
parties for all relevant trading violations
FINRA surveils trading on the Exchange pursuant to a regulatory services agreement The Exchange is responsible for FINRArsquos performance under this regulatory services agreement
39
SR-NASDAQ-2015-011 Amendment No 2 Page 24 of 64
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 25 of 64
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
b Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
SR-NASDAQ-2015-011 Amendment No 2 Page 26 of 64
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
SR-NASDAQ-2015-011 Amendment No 2 Page 27 of 64
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
SR-NASDAQ-2015-011 Amendment No 2 Page 28 of 64
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
SR-NASDAQ-2015-011 Amendment No 2 Page 29 of 64
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
SR-NASDAQ-2015-011 Amendment No 2 Page 30 of 64
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
SR-NASDAQ-2015-011 Amendment No 2 Page 31 of 64
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
4 Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
5 Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received from Members Participants or Others
Written comments were neither solicited nor received
6 Extension of Time Period for Commission Action
The Exchange does not consent at this time to an extension of any time period for
Commission action
7 Basis for Summary Effectiveness Pursuant to Section 19(b)(3) or for Accelerated Effectiveness Pursuant to Section 19(b)(2)
Not applicable
8 Proposed Rule Change Based on Rules of Another Self-Regulatory Organization or of the Commission
Not applicable
9 Security-Based Swap Submissions Filed Pursuant to Section 3C of the Act
Not applicable
SR-NASDAQ-2015-011 Amendment No 2 Page 32 of 64
10 Advance Notices Filed Pursuant to Section 806(e) of the Payment Clearing and Settlement Supervision Act
Not applicable
11 Exhibits
1 Completed notice of proposed rule change for publication in the Federal
Register
SR-NASDAQ-2015-011 Amendment No 2 Page 33 of 64
EXHIBIT 1
SECURITIES AND EXCHANGE COMMISSION (Release No 34shy File No SR-NASDAQ-2015-011)
April __ 2015
Self-Regulatory Organizations The NASDAQ Stock Market LLC Notice of Filing of Proposed Rule Change Relating to the Listing and Trading of the Shares of the First Trust Strategic Floating Rate ETF of First Trust Exchange-Traded Fund IV
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (ldquoActrdquo)1 and
Rule 19b-4 thereunder2 notice is hereby given that on February 12 2015 The NASDAQ
Stock Market LLC (ldquoNasdaqrdquo or the ldquoExchangerdquo) filed with the Securities and Exchange
Commission (ldquoCommissionrdquo) the proposed rule change as described in in Items I II and
III below which Items have been prepared by Nasdaq On April 6 2015 Nasdaq filed
Amendment No 1 which replaced the text of the original filing in its entirety On April
15 2015 Nasdaq filed Amendment No 2 which replaced the text of the original filing in
its entirety The Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons
I Self-Regulatory Organizationrsquos Statement of the Terms of Substance of the Proposed Rule Change
Nasdaq proposes to list and trade the shares of the First Trust Strategic Floating
Rate ETF (the ldquoFundrdquo) of the First Trust Strategic Floating Rate ETF (the ldquoFundrdquo) of
First Trust Exchange-Traded Fund IV (the ldquoTrustrdquo) under Nasdaq Rule 5735 (ldquoManaged
1 15 USC 78s(b)(1)
2 17 CFR 24019b-4
SR-NASDAQ-2015-011 Amendment No 2 Page 34 of 64
Fund Sharesrdquo)3 The shares of the Fund are collectively referred to herein as the
ldquoSharesrdquo
The text of the proposed rule change is available at
httpnasdaqcchwallstreetcom at Nasdaqrsquos principal office and at the Commissionrsquos
Public Reference Room
II Self-Regulatory Organizationrsquos Statement of the Purpose of and Statutory Basis for the Proposed Rule Change
In its filing with the Commission Nasdaq included statements concerning the
purpose of and basis for the proposed rule change The text of these statements may be
examined at the places specified in Item IV below Nasdaq has prepared summaries set
forth in Sections A B and C below of the most significant aspects of such statements
A Self-Regulatory Organizationrsquos Statement of the Purpose of and Statutory Basis for the Proposed Rule Change
1 Purpose
The Exchange proposes to list and trade the Shares of the Fund under Nasdaq
Rule 5735 which governs the listing and trading of Managed Fund Shares4 on the
3 The Commission approved Nasdaq Rule 5735 in Securities Exchange Act Release No 57962 (June 13 2008) 73 FR 35175 (June 20 2008) (SR-NASDAQ-2008shy039) There are already multiple actively-managed funds listed on the Exchange see eg Securities Exchange Act Release Nos 69464 (April 26 2013) 78 FR 25774 (May 2 2013) (SR-NASDAQ-2013-036) (order approving listing and trading of First Trust Senior Loan Fund) 68972 (February 22 2013) 78 FR 13721 (February 28 2013) (SR-NASDAQ-2012-147) (order approving listing and trading of First Trust High Yield LongShort ETF) 66489 (February 29 2012) 77 FR 13379 (March 6 2012) (SR-NASDAQ-2012-004) (order approving listing and trading of WisdomTree Emerging Markets Corporate Bond Fund) The Exchange believes the proposed rule change raises no significant issues not previously addressed in those prior Commission orders
4 A Managed Fund Share is a security that represents an interest in an investment company registered under the Investment Company Act of 1940 (15 USC 80ashy
SR-NASDAQ-2015-011 Amendment No 2 Page 35 of 64
Exchange The Fund will be an actively-managed exchange-traded fund (ldquoETFrdquo) The
Shares will be offered by the Trust which was established as a Massachusetts business
trust on September 15 20105 The Trust is registered with the Commission as an
investment company and has filed a registration statement on Form N-1A (ldquoRegistration
Statementrdquo) with the Commission6 The Fund will be a series of the Trust The Fund
intends to qualify each year as a regulated investment company (ldquoRICrdquo) under
Subchapter M of the Internal Revenue Code of 1986 as amended
First Trust Advisors LP will be the investment adviser (ldquoAdviserrdquo) to the Fund
First Trust Portfolios LP (the ldquoDistributorrdquo) will be the principal underwriter and
distributor of the Fundrsquos Shares The Bank of New York Mellon Corporation (ldquoBNYrdquo)
will act as the administrator accounting agent custodian and transfer agent to the Fund
1) (the ldquo1940 Actrdquo) organized as an open-end investment company or similar entity that invests in a portfolio of securities selected by its investment adviser consistent with its investment objectives and policies In contrast an open-end investment company that issues Index Fund Shares listed and traded on the Exchange under Nasdaq Rule 5705 seeks to provide investment results that correspond generally to the price and yield performance of a specific foreign or domestic stock index fixed income securities index or combination thereof
5 The Commission has issued an order upon which the Trust may rely granting certain exemptive relief under the 1940 Act See Investment Company Act Release No 30029 (April 10 2012) (File No 812-13795) (the ldquoExemptive Reliefrdquo) In addition the Commission has issued no-action relief upon which the Trust may rely pertaining to the Fundrsquos ability to invest in derivatives notwithstanding certain representations in the application for the Exemptive Relief See Commission No-Action Letter (December 6 2012)
6 See Post-Effective Amendment No 104 to Registration Statement on Form N-1A for the Trust dated January 29 2015 (File Nos 333-174332 and 811-22559) The descriptions of the Fund and the Shares contained herein are based in part on information in the Registration Statement
7
SR-NASDAQ-2015-011 Amendment No 2 Page 36 of 64
Paragraph (g) of Rule 5735 provides that if the investment adviser to the
investment company issuing Managed Fund Shares is affiliated with a broker-dealer
such investment adviser shall erect a ldquofire wallrdquo between the investment adviser and the
broker-dealer with respect to access to information concerning the composition andor
changes to such investment company portfolio7 In addition paragraph (g) further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio Rule 5735(g) is similar
to Nasdaq Rule 5705(b)(5)(A)(i) however paragraph (g) in connection with the
establishment of a ldquofire wallrdquo between the investment adviser and the broker-dealer
reflects the applicable open-end fundrsquos portfolio not an underlying benchmark index as
is the case with index-based funds The Adviser is not a broker-dealer although it is
affiliated with the Distributor a broker-dealer The Adviser has implemented a fire wall
An investment adviser to an open-end fund is required to be registered under the Investment Advisers Act of 1940 (the ldquoAdvisers Actrdquo) As a result the Adviser and its related personnel are subject to the provisions of Rule 204A-1 under the Advisers Act relating to codes of ethics This Rule requires investment advisers to adopt a code of ethics that reflects the fiduciary nature of the relationship to clients as well as compliance with other applicable securities laws Accordingly procedures designed to prevent the communication and misuse of non-public information by an investment adviser must be consistent with Rule 204A-1 under the Advisers Act In addition Rule 206(4)-7 under the Advisers Act makes it unlawful for an investment adviser to provide investment advice to clients unless such investment adviser has (i) adopted and implemented written policies and procedures reasonably designed to prevent violation by the investment adviser and its supervised persons of the Advisers Act and the Commission rules adopted thereunder (ii) implemented at a minimum an annual review regarding the adequacy of the policies and procedures established pursuant to subparagraph (i) above and the effectiveness of their implementation and (iii) designated an individual (who is a supervised person) responsible for administering the policies and procedures adopted under subparagraph (i) above
8
SR-NASDAQ-2015-011 Amendment No 2 Page 37 of 64
with respect to its broker-dealer affiliate regarding access to information concerning the
composition andor changes to the portfolio In addition personnel who make decisions
on the Fundrsquos portfolio composition will be subject to procedures designed to prevent the
use and dissemination of material non-public information regarding the Fundrsquos portfolio
In the event (a) the Adviser becomes or becomes newly affiliated with a broker-dealer
or (b) any new adviser or sub-adviser is a registered broker-dealer or becomes affiliated
with another broker-dealer it will implement a fire wall with respect to its relevant
personnel andor such broker-dealer affiliate as applicable regarding access to
information concerning the composition andor changes to the portfolio and will be
subject to procedures designed to prevent the use and dissemination of material
non-public information regarding such portfolio The Fund does not currently intend to
use a sub-adviser
First Trust Strategic Floating Rate ETF
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions8 at least 80 of its
The term ldquounder normal market conditionsrdquo as used herein includes but is not limited to the absence of adverse market economic political or other conditions including extreme volatility or trading halts in the fixed income markets or the financial markets generally operational issues causing dissemination of inaccurate market information or force majeure type events such as systems failure natural or man-made disaster act of God armed conflict act of terrorism riot or labor disruption or any similar intervening circumstance For temporary defensive purposes during the initial invest-up period and during periods of high cash inflows or outflows the Fund may depart from its principal investment strategies for example it may hold a higher than normal proportion of its assets in cash During such periods the Fund may not be able to achieve its investment objective The Fund may adopt a defensive strategy when the Adviser believes securities in which the Fund normally invests have elevated risks due to political or economic factors and in other extraordinary circumstances
SR-NASDAQ-2015-011 Amendment No 2 Page 38 of 64
net assets in a portfolio of the following types of floating-rate9 debt instruments issued by
US and non-US public- and private-sector entities floating-rate corporate10 and
government bonds and notes floating-rate agency securities 11 floating-rate instruments
of non-US issuers floating-rate privately-issued securities 12 floating-rate asset-backed
securities 13 floating-rate mortgage-backed securities14 floating-rate loans 15 and
9 For the avoidance of doubt the term ldquofloating-raterdquo shall also include similar terms such as ldquovariable-raterdquo and ldquoadjustable-raterdquo
10 The Adviser expects that under normal market conditions generally for a corporate bond to be considered as an eligible investment after taking into account such an investment at least 75 of the Fundrsquos net assets that are invested in floating-rate corporate bonds and as described below fixed-rate corporate bonds (in the aggregate) will be comprised of corporate bonds that have at the time of original issuance $100 million or more par amount outstanding
11 ldquoAgency securitiesrdquo for these purposes generally includes securities issued by the following entities Government National Mortgage Association (Ginnie Mae) Federal National Mortgage Association (Fannie Mae) Federal Home Loan Banks (FHLBanks) Federal Home Loan Mortgage Corporation (Freddie Mac) Farm Credit System (FCS) Farm Credit Banks (FCBanks) Student Loan Marketing Association (Sallie Mae) Resolution Funding Corporation (REFCORP) Financing Corporation (FICO) and the Farm Credit System (FCS) Financial Assistance Corporation (FAC) Agency securities can include but are not limited to mortgage-backed securities
12 ldquoPrivately-issued securitiesrdquo for these purposes generally includes Rule 144A securities other than mortgage-backed Rule 144A securities Under normal market conditions privately-issued securities will have at the time of original issuance $100 million or more principal amount outstanding to be considered eligible investments
13 Asset-backed securities are securities that are backed by a pool of assets The Fund currently intends to invest in asset-backed securities that are consumer asset-backed securities
14 Mortgage-backed securities which are securities that directly or indirectly represent a participation in or are secured by and payable from mortgage loans on real property will consist of (1) residential mortgage-backed securities (ldquoRMBSrdquo) (2) commercial mortgage-backed securities (ldquoCMBSrdquo) (3) stripped mortgage-backed securities (ldquoSMBSrdquo) which are mortgage-backed securities
SR-NASDAQ-2015-011 Amendment No 2 Page 39 of 64
investment companies16 (including investment companies advised by the Adviser) that
invest primarily in the foregoing types of debt instruments17 (collectively ldquoFloating Rate
Debt Instrumentsrdquo)
where mortgage payments are divided between paying the loanrsquos principal and paying the loanrsquos interest (4) collateralized mortgage obligations (ldquoCMOsrdquo) and real estate mortgage investment conduits (ldquoREMICsrdquo) which are mortgage-backed securities that are divided into multiple classes with each class being entitled to a different share of the principal and interest payments received from the pool of underlying assets
15 The floating-rate loans in which the Fund will invest will represent amounts borrowed by companies or other entities from banks and other lenders and a significant portion of such floating-rate loans may be rated below investment grade or unrated Floating-rate loans held by the Fund may be senior or subordinate obligations of the borrower and may or may not be secured by collateral First lien senior secured floating-rate loans are referred to herein as ldquosenior loansrdquo Floating-rate loans that are not senior loans (ie unsecured floating-rate loans and secured floating-rate loans that are not first lien floating-rate loans) are referred to herein as ldquojunior loansrdquo The Fund will generally invest in floating-rate loans that the Adviser deems to be liquid with readily available prices notwithstanding the foregoing the Fund may invest in floating-rate loans that are deemed illiquid so long as the Fund complies with the 15 limitation on investments of its net assets in illiquid assets described below under ldquoInvestment Restrictionsrdquo
16 The Fund currently anticipates investing only in registered open-end investment companies that are listed and traded in the US on registered exchanges (ie other ETFs) An ETF is an investment company registered under the 1940 Act that holds a portfolio of securities Many ETFs are designed to track the performance of a securities index including industry sector country and region indexes The Fund may invest in the securities of ETFs in excess of the limits imposed under the 1940 Act pursuant to exemptive orders obtained by other ETFs and their sponsors from the Commission In addition the Fund may invest in the securities of certain investment companies in excess of the limits imposed under the 1940 Act pursuant to an exemptive order obtained by the Trust and the Adviser from the Commission See Investment Company Act Release No 30377 (February 5 2013) (File No 812-13895) The ETFs in which the Fund may invest include Index Fund Shares (as described in Nasdaq Rule 5705) Portfolio Depository Receipts (as described in Nasdaq Rule 5705) and Managed Fund Shares (as described in Nasdaq Rule 5735) While the Fund may invest in inverse ETFs the Fund will not invest in leveraged or inverse leveraged (eg 2X or -3X) ETFs
SR-NASDAQ-2015-011 Amendment No 2 Page 40 of 64
At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade To be considered
ldquoinvestment graderdquo under normal market conditions rated Floating Rate Debt
Instruments will carry at the time of purchase a rating in the highest four rating
categories of at least one nationally recognized statistical ratings organization
(ldquoNRSROrdquo) (eg BBB- or higher by Standard amp Poorrsquos Ratings Services (ldquoSampPrdquo)
andor Fitch Ratings (ldquoFitchrdquo) or Baa3 or higher by Moodyrsquos Investors Service Inc
(ldquoMoodyrsquosrdquo)18 For unrated securities to be considered ldquoinvestment graderdquo under normal
market conditions such securities will be determined at the time of purchase to be of
comparable quality19 by the Adviser The Fund may invest up to 35 of its net assets in
securities that are at the time of investment rated below investment grade by each
NRSRO rating such securities (or securities that are unrated and determined by the
17 The liquidity of a security especially in the case of asset-backed and mortgage-backed securities will be a substantial factor in the Fundrsquos security selection process Consistent with the discussion below under ldquoInvestment Restrictionsrdquo the Fund will not purchase any Floating Rate Debt Instruments (including asset-backed securities and mortgage-backed securities) that in the Adviserrsquos opinion are illiquid if as a result more than 15 of the value of the Fundrsquos net assets will be invested in illiquid assets
18 For the avoidance of doubt if a security is rated by multiple NRSROs and receives different ratings the Fund will treat the security as being rated in the highest rating category received from an NRSRO
19 Comparable quality of unrated securities will be determined by the Adviser based on fundamental credit analysis of the unrated security and comparable NRSRO-rated securities On a best efforts basis the Adviser will attempt to make a rating determination based on publicly available data In making a ldquocomparable qualityrdquo determination the Adviser may consider for example whether the issuer of the security has issued other rated securities the nature and provisions of the relevant security whether the obligations under the relevant security are guaranteed by another entity and the rating of such guarantor (if any) relevant cash flows macroeconomic analysis andor sector or industry analysis
SR-NASDAQ-2015-011 Amendment No 2 Page 41 of 64
Adviser to be of comparable quality) commonly referred to as ldquohigh yieldrdquo or ldquojunkrdquo
bonds If subsequent to purchase by the Fund a security held by the Fund experiences a
decline in credit quality and falls below investment grade the Fund may continue to hold
the security and it will not cause the Fund to violate the 35 investment limitation
however the security will be taken into account for purposes of determining whether
purchases of additional securities will cause the Fund to violate such limitation
The Fund will limit its investments in asset-backed securities (excluding agency
mortgage-backed securities) and non-agency mortgage-backed securities (in the
aggregate) to 20 of its net assets20 In addition the Fund will limit its investments in
junior loans to 20 of its net assets
The Fund will hold debt securities (including in the aggregate Floating Rate
Debt Instruments and the fixed-rate debt securities described below) of at least 13
non-affiliated issuers
Other Investments
Under normal market conditions the Fund will invest primarily in the Floating
Rate Debt Instruments described above to meet its investment objective In addition the
Fund may invest up to 20 of its net assets in the following types of fixed-rate debt
securities corporate21 and government bonds and notes agency securities22 instruments
20 For the avoidance of doubt there is no limitation on the Fundrsquos investments in agency mortgage-backed securities
21 See footnote 10 above
22 See footnote 11 above
SR-NASDAQ-2015-011 Amendment No 2 Page 42 of 64
of non-US issuers in developed markets privately-issued securities 23 asset-backed
securities 24 mortgage-backed securities 25 municipal bonds money market securities26
and investment companies27 (including investment companies advised by the Adviser)
that invest primarily in the foregoing types of debt securities
Further to pursue its investment objective the Fund may invest up to 20 of the
value of its net assets in exchange-listed options on US Treasury futures contracts and
exchange-listed US Treasury futures contracts28 The use of these derivative
transactions may allow the Fund to obtain net long or short exposures to selected interest
rates These derivatives may also be used to hedge risks including interest rate risks and
credit risks associated with the Fundrsquos portfolio investments The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
23 See footnote 12 above
24 See footnote 13 above
25 See footnote 14 above
26 ldquoMoney market securitiesrdquo for these purposes generally includes short-term high-quality obligations issued or guaranteed by the US Treasury or the agencies or instrumentalities of the US government short-term high-quality securities issued or guaranteed by non-US governments agencies and instrumentalities repurchase agreements commercial paper (both asset-backed and non-assetshybacked) and deposits and other obligations of US and non-US banks and financial institutions
27 See footnote 16 above
28 At least 90 of the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be invested in instruments that trade in markets that are members of the Intermarket Surveillance Group (ldquoISGrdquo) (see footnote 40 below) or are parties to a comprehensive surveillance sharing agreement with the Exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 43 of 64
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index
Investment Restrictions
The Fund will not invest 25 or more of the value of its total assets in securities
of issuers in any one industry This restriction does not apply to (a) obligations issued or
guaranteed by the US government its agencies or instrumentalities or (b) securities of
other investment companies29
The Fund may hold up to an aggregate amount of 15 of its net assets in illiquid
assets (calculated at the time of investment) including Rule 144A securities deemed
illiquid by the Adviser30 The Fund will monitor its portfolio liquidity on an ongoing
basis to determine whether in light of current circumstances an adequate level of
liquidity is being maintained and will consider taking appropriate steps in order to
maintain adequate liquidity if through a change in values net assets or other
circumstances more than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid
assets include securities subject to contractual or other restrictions on resale and other
29 See Form N-1A Item 9 The Commission has taken the position that a fund is concentrated if it invests more than 25 of the value of its total assets in any one industry See eg Investment Company Act Release No 9011 (October 30 1975) 40 FR 54241 (November 21 1975)
30 In reaching liquidity decisions the Adviser may consider the following factors the frequency of trades and quotes for the security the number of dealers wishing to purchase or sell the security and the number of other potential purchasers dealer undertakings to make a market in the security and the nature of the security and the nature of the marketplace in which it trades (eg the time needed to dispose of the security the method of soliciting offers and the mechanics of transfer)
SR-NASDAQ-2015-011 Amendment No 2 Page 44 of 64
instruments that lack readily available markets as determined in accordance with
Commission staff guidance31
The Fund will not invest in non-US equity securities
Creation and Redemption of Shares
The Fund will issue and redeem Shares on a continuous basis at net asset value
(ldquoNAVrdquo)32 only in large blocks of Shares (ldquoCreation Unitsrdquo) in transactions with
authorized participants generally including broker-dealers and large institutional
investors (ldquoAuthorized Participantsrdquo) Creation Units generally will consist of 50000
Shares although this may change from time to time Creation Units however are not
expected to consist of less than 50000 Shares As described in the Registration
Statement and consistent with the Exemptive Relief the Fund will issue and redeem
Creation Units in exchange for an in-kind portfolio of instruments andor cash in lieu of
31 The Commission has stated that long-standing Commission guidelines have required open-end funds to hold no more than 15 of their net assets in illiquid securities and other illiquid assets See Investment Company Act Release No 28193 (March 11 2008) 73 FR 14618 (March 18 2008) footnote 34 See also Investment Company Act Release No 5847 (October 21 1969) 35 FR 19989 (December 31 1970) (Statement Regarding ldquoRestricted Securitiesrdquo) Investment Company Act Release No 18612 (March 12 1992) 57 FR 9828 (March 20 1992) (Revisions of Guidelines to Form N-1A) A fundrsquos portfolio security is illiquid if it cannot be disposed of in the ordinary course of business within seven days at approximately the value ascribed to it by the fund See Investment Company Act Release No 14983 (March 12 1986) 51 FR 9773 (March 21 1986) (adopting amendments to Rule 2a-7 under the 1940 Act) Investment Company Act Release No 17452 (April 23 1990) 55 FR 17933 (April 30 1990) (adopting Rule 144A under the Securities Act of 1933)
32 The NAV of the Fundrsquos Shares generally will be calculated once daily Monday through Friday as of the close of regular trading on the New York Stock Exchange generally 400 pm Eastern Time (the ldquoNAV Calculation Timerdquo) NAV per Share will be calculated by dividing the Fundrsquos net assets by the number of Fund Shares outstanding For more information regarding the valuation of Fund investments in calculating the Fundrsquos NAV see the Registration Statement
SR-NASDAQ-2015-011 Amendment No 2 Page 45 of 64
such instruments (the ldquoCreation Basketrdquo) In addition if there is a difference between the
NAV attributable to a Creation Unit and the market value of the Creation Basket
exchanged for the Creation Unit the party conveying instruments with the lower value
will pay to the other an amount in cash equal to the difference (referred to as the ldquoCash
Componentrdquo)
Creations and redemptions must be made by or through an Authorized Participant
that has executed an agreement that has been agreed to by the Distributor and BNY with
respect to creations and redemptions of Creation Units All standard orders to create
Creation Units must be received by the transfer agent no later than the closing time of the
regular trading session on the New York Stock Exchange (ordinarily 400 pm Eastern
Time) (the ldquoClosing Timerdquo) in each case on the date such order is placed in order for the
creation of Creation Units to be effected based on the NAV of Shares as next determined
on such date after receipt of the order in proper form Shares may be redeemed only in
Creation Units at their NAV next determined after receipt not later than the Closing Time
of a redemption request in proper form by the Fund through the transfer agent and only
on a business day
The Fundrsquos custodian through the National Securities Clearing Corporation will
make available on each business day prior to the opening of business of the Exchange
the list of the names and quantities of the instruments comprising the Creation Basket as
well as the estimated Cash Component (if any) for that day The published Creation
Basket will apply until a new Creation Basket is announced on the following business
day prior to commencement of trading in the Shares
SR-NASDAQ-2015-011 Amendment No 2 Page 46 of 64
Net Asset Value
The Fundrsquos NAV will be determined as of the close of trading (normally
400 pm Eastern Time) on each day the New York Stock Exchange is open for
business NAV will be calculated for the Fund by taking the market price of the Fundrsquos
total assets including interest or dividends accrued but not yet collected less all
liabilities and dividing such amount by the total number of Shares outstanding The
result rounded to the nearest cent will be the NAV per Share All valuations will be
subject to review by the Board of Trustees of the Trust (ldquoTrust Boardrdquo) or its delegate
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with valuation procedures (which may be revised from time to time) adopted by the Trust
Board (the ldquoValuation Proceduresrdquo) and in accordance with the 1940 Act A market
valuation generally means a valuation (i) obtained from an exchange an independent
pricing service (ldquoPricing Servicerdquo) or a major market maker (or dealer) or (ii) based on a
price quotation or other equivalent indication of value supplied by an exchange a Pricing
Service or a major market maker (or dealer) The information summarized below is
based on the Valuation Procedures as currently in effect however as noted above the
Valuation Procedures are amended from time to time and therefore such information is
subject to change
Certain securities including Floating Rate Debt Instruments in which the Fund
may invest will not be listed on any securities exchange or board of trade Such
securities will typically be bought and sold by institutional investors in individually
negotiated private transactions that function in many respects like an over-the-counter
SR-NASDAQ-2015-011 Amendment No 2 Page 47 of 64
secondary market although typically no formal market makers will exist Certain
securities particularly debt securities will have few or no trades or trade infrequently
and information regarding a specific security may not be widely available or may be
incomplete Accordingly determinations of the fair value of debt securities may be
based on infrequent and dated information Because there is less reliable objective data
available elements of judgment may play a greater role in valuation of debt securities
than for other types of securities Typically Floating Rate Debt Instruments and other
debt securities in which the Fund may invest (other than those described below) will be
valued using information provided by a Pricing Service Debt securities having a
remaining maturity of 60 days or less when purchased will be valued at cost adjusted for
amortization of premiums and accretion of discounts provided the Adviserrsquos pricing
committee (the ldquoPricing Committeerdquo) has determined that the use of amortized cost is an
appropriate reflection of fair value given market and issuer-specific conditions existing at
the time of the determination Overnight repurchase agreements will be valued at cost
and term repurchase agreements (ie those whose maturity exceeds seven days) will be
valued at the average of the bid quotations obtained daily from at least two recognized
dealers
Asset-backed and mortgage-backed securities will generally be valued by using a
Pricing Service If a Pricing Service does not cover a particular asset-backed or
mortgage-backed security or discontinues covering a particular asset-backed or
mortgage-backed security the security will be priced using broker quotes generally
provided by brokers that make or participate in markets in the security To derive values
Pricing Services and broker-dealers may use matrix pricing and valuation models as well
SR-NASDAQ-2015-011 Amendment No 2 Page 48 of 64
as recent market transactions for the same or similar assets As it deems appropriate the
Pricing Committee may determine that a Pricing Service price does not represent an
accurate value of an asset-backed or mortgage-backed security based on broker quotes it
receives a recent trade in the security by the Fund information from a portfolio manager
or other market information In the event that the Pricing Committee determines that the
Pricing Service price is unreliable or inaccurate based on such other information broker
quotes may be used Additionally if the Pricing Committee determines that the price of
an asset-backed or mortgage-backed security obtained from a Pricing Service and
available broker quotes is unreliable or inaccurate due to market conditions or other
reasons or if a Pricing Service price or broker quote is unavailable the security will be
valued using fair value pricing as described below
Equity securities listed on any exchange other than the Exchange will be valued at
the last sale price on the exchange on which they are principally traded on the business
day as of which such value is being determined Equity securities listed on the Exchange
will be valued at the official closing price on the business day as of which such value is
being determined If there has been no sale on such day or no official closing price in
the case of securities traded on the Exchange the securities will be valued using fair
value pricing as described below Equity securities traded on more than one securities
exchange will be valued at the last sale price or official closing price as applicable on
the business day as of which such value is being determined at the close of the exchange
representing the principal market for such securities
Exchange-traded options and futures contracts will be valued at the closing price
in the market where such contracts are principally traded
SR-NASDAQ-2015-011 Amendment No 2 Page 49 of 64
Certain securities including Floating Rate Debt Instruments in which the Fund
will invest will not be able to be priced by pre-established pricing methods Such
securities may be valued by the Trust Board or its delegate at fair value The use of fair
value pricing by the Fund will be governed by the Valuation Procedures and conducted in
accordance with the provisions of the 1940 Act Valuing the Fundrsquos securities using fair
value pricing will result in using prices for those securities that may differ from current
market valuations or official closing prices on the applicable exchange
Availability of Information
The Fundrsquos website (wwwftportfolioscom) which will be publicly available
prior to the public offering of Shares will include a form of the prospectus for the Fund
that may be downloaded The website will include the Sharesrsquo ticker CUSIP and
exchange information along with additional quantitative information updated on a daily
basis including for the Fund (1) daily trading volume the prior business dayrsquos reported
NAV and closing price mid-point of the bidask spread at the time of calculation of such
NAV (the ldquoBidAsk Pricerdquo)33 and a calculation of the premium and discount of the
BidAsk Price against the NAV and (2) data in chart format displaying the frequency
distribution of discounts and premiums of the daily BidAsk Price against the NAV
within appropriate ranges for each of the four previous calendar quarters On each
business day before commencement of trading in Shares in the Regular Market Session34
33 The BidAsk Price of the Fund will be determined using the mid-point of the highest bid and the lowest offer on the Exchange as of the time of calculation of the Fundrsquos NAV The records relating to BidAsk Prices will be retained by the Fund and its service providers
34 See Nasdaq Rule 4120(b)(4) (describing the three trading sessions on the Exchange (1) Pre-Market Session from 4 am to 930 am Eastern Time (2)
SR-NASDAQ-2015-011 Amendment No 2 Page 50 of 64
on the Exchange the Fund will disclose on its website the identities and quantities of the
portfolio of securities and other assets (the ldquoDisclosed Portfoliordquo as defined in Nasdaq
Rule 5735(c)(2)) held by the Fund that will form the basis for the Fundrsquos calculation of
NAV at the end of the business day 35 The Fundrsquos disclosure of derivative positions in
the Disclosed Portfolio will include information that market participants can use to value
these positions intraday On a daily basis the Fund will disclose on the Fundrsquos website
the following information regarding each portfolio holding as applicable to the type of
holding ticker symbol CUSIP number or other identifier if any a description of the
holding (including the type of holding) the identity of the security or other asset or
instrument underlying the holding if any for options the option strike price quantity
held (as measured by for example par value notional value or number of shares
contracts or units) maturity date if any coupon rate if any effective date if any market
value of the holding and percentage weighting of the holding in the Fundrsquos portfolio
The website information will be publicly available at no charge
In addition for the Fund an estimated value defined in Rule 5735(c)(3) as the
ldquoIntraday Indicative Valuerdquo that reflects an estimated intraday value of the Fundrsquos
Disclosed Portfolio will be disseminated Moreover the Intraday Indicative Value
Regular Market Session from 930 am to 4 pm or 415 pm Eastern Time and (3) Post-Market Session from 4 pm or 415 pm to 8 pm Eastern Time)
Under accounting procedures to be followed by the Fund trades made on the prior business day (ldquoTrdquo) will be booked and reflected in NAV on the current business day (ldquoT+1rdquo) Accordingly the Fund will be able to disclose at the beginning of the business day the portfolio that will form the basis for the NAV calculation at the end of the business day
35
SR-NASDAQ-2015-011 Amendment No 2 Page 51 of 64
available on the NASDAQ OMX Information LLC proprietary index data service36 will
be based upon the current value for the components of the Disclosed Portfolio and will be
updated and widely disseminated by one or more major market data vendors and broadly
displayed at least every 15 seconds during the Regular Market Session The Intraday
Indicative Value will be based on quotes and closing prices from the securitiesrsquo local
market and may not reflect events that occur subsequent to the local marketrsquos close
Premiums and discounts between the Intraday Indicative Value and the market price may
occur This should not be viewed as a ldquoreal timerdquo update of the NAV per Share of the
Fund which is calculated only once a day
The dissemination of the Intraday Indicative Value together with the Disclosed
Portfolio will allow investors to determine the value of the underlying portfolio of the
Fund on a daily basis and will provide a close estimate of that value throughout the
trading day
Investors will also be able to obtain the Fundrsquos Statement of Additional
Information (ldquoSAIrdquo) the Fundrsquos annual and semi-annual reports (together ldquoShareholder
Reportsrdquo) and its Form N-CSR and Form N-SAR filed twice a year The Fundrsquos SAI
and Shareholder Reports will be available free upon request from the Fund and those
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or
downloaded from the Commissionrsquos website at wwwsecgov Information regarding
Currently the NASDAQ OMX Global Index Data Service (ldquoGIDSrdquo) is the NASDAQ OMX global index data feed service offering real-time updates daily summary messages and access to widely followed indexes and Intraday Indicative Values for ETFs GIDS provides investment professionals with the daily information needed to track or trade NASDAQ OMX indexes listed ETFs or third-party partner indexes and ETFs
36
SR-NASDAQ-2015-011 Amendment No 2 Page 52 of 64
market price and trading volume of the Shares will be continually available on a real-time
basis throughout the day on brokersrsquo computer screens and other electronic services
Information regarding the previous dayrsquos closing price and trading volume information
for the Shares will be published daily in the financial section of newspapers Quotation
and last sale information for the Shares will be available via Nasdaq proprietary quote
and trade services as well as in accordance with the Unlisted Trading Privileges and the
Consolidated Tape Association (ldquoCTArdquo) plans for the Shares Quotation and last sale
information for the other ETFs in which the Fund will invest will be available via the
quote and trade services of their respective primary exchanges as well as in accordance
with the Unlisted Trading Privileges and the CTA plans as applicable Quotation and
last sale information for US exchange-traded options will be available via the Options
Price Reporting Authority Intraday executable price quotations on Floating Rate Debt
Instruments and other assets not traded on an exchange will be available from major
broker-dealer firms or market data vendors as well as from automated quotation systems
published or other public sources or online information services Additionally the Trade
Reporting and Compliance Engine (ldquoTRACErdquo) of the Financial Industry Regulatory
Authority (ldquoFINRArdquo) will be a source of price information for corporate bonds
privately-issued securities mortgage-backed securities and asset-backed securities to the
extent transactions in such securities are reported to TRACE37 For exchange-traded
Broker-dealers that are FINRA member firms have an obligation to report transactions in specified debt securities to TRACE to the extent required under applicable FINRA rules Generally such debt securities will have at issuance a maturity that exceeds one calendar year
37
SR-NASDAQ-2015-011 Amendment No 2 Page 53 of 64
assets intraday pricing information will be available directly from the applicable listing
exchange
Additional information regarding the Fund and the Shares including investment
strategies risks creation and redemption procedures fees Fund holdings disclosure
policies distributions and taxes will be included in the Registration Statement
Initial and Continued Listing
The Shares will be subject to Rule 5735 which sets forth the initial and continued
listing criteria applicable to Managed Fund Shares The Exchange represents that for
initial andor continued listing the Fund must be in compliance with Rule 10A-338 under
the Act A minimum of 100000 Shares will be outstanding at the commencement of
trading on the Exchange The Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the NAV and the
Disclosed Portfolio will be made available to all market participants at the same time
Trading Halts
With respect to trading halts the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading in the Shares of the Fund Nasdaq will
halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12) Trading may be
halted because of market conditions or for reasons that in the view of the Exchange
make trading in the Shares inadvisable These may include (1) the extent to which
trading is not occurring in the securities andor the other assets constituting the Disclosed
Portfolio of the Fund or (2) whether other unusual conditions or circumstances
See 17 CFR 24010A-3 38
SR-NASDAQ-2015-011 Amendment No 2 Page 54 of 64
detrimental to the maintenance of a fair and orderly market are present Trading in the
Shares also will be subject to Rule 5735(d)(2)(D) which sets forth circumstances under
which Shares of the Fund may be halted
Trading Rules
Nasdaq deems the Shares to be equity securities thus rendering trading in the
Shares subject to Nasdaqrsquos existing rules governing the trading of equity securities
Nasdaq will allow trading in the Shares from 400 am until 800 pm Eastern Time
The Exchange has appropriate rules to facilitate transactions in the Shares during all
trading sessions As provided in Nasdaq Rule 5735(b)(3) the minimum price variation
for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $001
Surveillance
The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws39 The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities laws
The surveillances referred to above generally focus on detecting securities trading
outside their normal patterns which could be indicative of manipulative or other violative
activity When such situations are detected surveillance analysis follows and
FINRA surveils trading on the Exchange pursuant to a regulatory services agreement The Exchange is responsible for FINRArsquos performance under this regulatory services agreement
39
SR-NASDAQ-2015-011 Amendment No 2 Page 55 of 64
investigations are opened where appropriate to review the behavior of all relevant
parties for all relevant trading violations
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 56 of 64
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
SR-NASDAQ-2015-011 Amendment No 2 Page 57 of 64
2 Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
SR-NASDAQ-2015-011 Amendment No 2 Page 58 of 64
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
SR-NASDAQ-2015-011 Amendment No 2 Page 59 of 64
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
SR-NASDAQ-2015-011 Amendment No 2 Page 60 of 64
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 61 of 64
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
SR-NASDAQ-2015-011 Amendment No 2 Page 62 of 64
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
B Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
C Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received From Members Participants or Others
Written comments were neither solicited nor received
III Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Within 45 days of the date of publication of this notice in the Federal Register or
within such longer period (i) as the Commission may designate up to 90 days of such date
if it finds such longer period to be appropriate and publishes its reasons for so finding or
(ii) as to which the Exchange consents the Commission shall (a) by order approve or
disapprove such proposed rule change or (b) institute proceedings to determine whether
the proposed rule change should be disapproved
SR-NASDAQ-2015-011 Amendment No 2 Page 63 of 64
IV Solicitation of Comments
Interested persons are invited to submit written data views and arguments
concerning the foregoing including whether the proposed rule change is consistent with
the Act Comments may be submitted by any of the following methods
Electronic comments
bull Use the Commissionrsquos Internet comment form
(httpwwwsecgovrulessroshtml) or
bull Send an e-mail to rule-commentssecgov Please include File Number
SR-NASDAQ-2015-011 on the subject line
Paper comments
bull Send paper comments in triplicate to Brent J Fields Secretary Securities and
Exchange Commission Station Place 100 F Street NE Washington DC
20549-9303
All submissions should refer to File Number SR-NASDAQ-2015-011 This file number
should be included on the subject line if e-mail is used To help the Commission process
and review your comments more efficiently please use only one method The
Commission will post all comments on the Commissionrsquos Internet website
httpwwwsecgovrulessroshtml
Copies of the submission all subsequent amendments all written statements with
respect to the proposed rule change that are filed with the Commission and all written
communications relating to the proposed rule change between the Commission and any
person other than those that may be withheld from the public in accordance with the
provisions of 5 USC 552 will be available for website viewing and printing in the
Commissionrsquos Public Reference Room 100 F Street NE Washington DC 20549 on
SR-NASDAQ-2015-011 Amendment No 2 Page 64 of 64
official business days between the hours of 1000 am and 300 pm Copies of the filing
also will be available for inspection and copying at the principal office of Nasdaq All
comments received will be posted without change the Commission does not edit
personal identifying information from submissions You should submit only information
that you wish to make available publicly
All submissions should refer to File Number SR-NASDAQ-2015-011 and should
be submitted on or before [insert date 21 days from publication in the Federal Register]
For the Commission by the Division of Trading and Markets pursuant to
delegated authority41
Kevin M OrsquoNeill Deputy Secretary
17 CFR 20030-3(a)(12) 41
SR-NASDAQ-2015-011 Amendment No 2 Page 6 of 64
to Nasdaq Rule 5705(b)(5)(A)(i) however paragraph (g) in connection with the
establishment of a ldquofire wallrdquo between the investment adviser and the broker-dealer
reflects the applicable open-end fundrsquos portfolio not an underlying benchmark index as
is the case with index-based funds The Adviser is not a broker-dealer although it is
affiliated with the Distributor a broker-dealer The Adviser has implemented a fire wall
with respect to its broker-dealer affiliate regarding access to information concerning the
composition andor changes to the portfolio In addition personnel who make decisions
on the Fundrsquos portfolio composition will be subject to procedures designed to prevent the
use and dissemination of material non-public information regarding the Fundrsquos portfolio
In the event (a) the Adviser becomes or becomes newly affiliated with a broker-dealer
or (b) any new adviser or sub-adviser is a registered broker-dealer or becomes affiliated
with another broker-dealer it will implement a fire wall with respect to its relevant
personnel andor such broker-dealer affiliate as applicable regarding access to
information concerning the composition andor changes to the portfolio and will be
subject to procedures designed to prevent the use and dissemination of material
non-public information regarding such portfolio The Fund does not currently intend to
use a sub-adviser
First Trust Strategic Floating Rate ETF
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions8 at least 80 of its
The term ldquounder normal market conditionsrdquo as used herein includes but is not limited to the absence of adverse market economic political or other conditions including extreme volatility or trading halts in the fixed income markets or the financial markets generally operational issues causing dissemination of inaccurate market information or force majeure type events such as systems
8
SR-NASDAQ-2015-011 Amendment No 2 Page 7 of 64
net assets in a portfolio of the following types of floating-rate9 debt instruments issued by
US and non-US public- and private-sector entities floating-rate corporate10 and
government bonds and notes floating-rate agency securities 11 floating-rate instruments
of non-US issuers floating-rate privately-issued securities 12 floating-rate asset-backed
failure natural or man-made disaster act of God armed conflict act of terrorism riot or labor disruption or any similar intervening circumstance For temporary defensive purposes during the initial invest-up period and during periods of high cash inflows or outflows the Fund may depart from its principal investment strategies for example it may hold a higher than normal proportion of its assets in cash During such periods the Fund may not be able to achieve its investment objective The Fund may adopt a defensive strategy when the Adviser believes securities in which the Fund normally invests have elevated risks due to political or economic factors and in other extraordinary circumstances
9 For the avoidance of doubt the term ldquofloating-raterdquo shall also include similar terms such as ldquovariable-raterdquo and ldquoadjustable-raterdquo
10 The Adviser expects that under normal market conditions generally for a corporate bond to be considered as an eligible investment after taking into account such an investment at least 75 of the Fundrsquos net assets that are invested in floating-rate corporate bonds and as described below fixed-rate corporate bonds (in the aggregate) will be comprised of corporate bonds that have at the time of original issuance $100 million or more par amount outstanding
11 ldquoAgency securitiesrdquo for these purposes generally includes securities issued by the following entities Government National Mortgage Association (Ginnie Mae) Federal National Mortgage Association (Fannie Mae) Federal Home Loan Banks (FHLBanks) Federal Home Loan Mortgage Corporation (Freddie Mac) Farm Credit System (FCS) Farm Credit Banks (FCBanks) Student Loan Marketing Association (Sallie Mae) Resolution Funding Corporation (REFCORP) Financing Corporation (FICO) and the Farm Credit System (FCS) Financial Assistance Corporation (FAC) Agency securities can include but are not limited to mortgage-backed securities
12 ldquoPrivately-issued securitiesrdquo for these purposes generally includes Rule 144A securities other than mortgage-backed Rule 144A securities Under normal market conditions privately-issued securities will have at the time of original issuance $100 million or more principal amount outstanding to be considered eligible investments
SR-NASDAQ-2015-011 Amendment No 2 Page 8 of 64
securities 13 floating-rate mortgage-backed securities14 floating-rate loans 15 and
investment companies16 (including investment companies advised by the Adviser) that
13 Asset-backed securities are securities that are backed by a pool of assets The Fund currently intends to invest in asset-backed securities that are consumer asset-backed securities
14 Mortgage-backed securities which are securities that directly or indirectly represent a participation in or are secured by and payable from mortgage loans on real property will consist of (1) residential mortgage-backed securities (ldquoRMBSrdquo) (2) commercial mortgage-backed securities (ldquoCMBSrdquo) (3) stripped mortgage-backed securities (ldquoSMBSrdquo) which are mortgage-backed securities where mortgage payments are divided between paying the loanrsquos principal and paying the loanrsquos interest (4) collateralized mortgage obligations (ldquoCMOsrdquo) and real estate mortgage investment conduits (ldquoREMICsrdquo) which are mortgage-backed securities that are divided into multiple classes with each class being entitled to a different share of the principal and interest payments received from the pool of underlying assets
15 The floating-rate loans in which the Fund will invest will represent amounts borrowed by companies or other entities from banks and other lenders and a significant portion of such floating-rate loans may be rated below investment grade or unrated Floating-rate loans held by the Fund may be senior or subordinate obligations of the borrower and may or may not be secured by collateral First lien senior secured floating-rate loans are referred to herein as ldquosenior loansrdquo Floating-rate loans that are not senior loans (ie unsecured floating-rate loans and secured floating-rate loans that are not first lien floating-rate loans) are referred to herein as ldquojunior loansrdquo The Fund will generally invest in floating-rate loans that the Adviser deems to be liquid with readily available prices notwithstanding the foregoing the Fund may invest in floating-rate loans that are deemed illiquid so long as the Fund complies with the 15 limitation on investments of its net assets in illiquid assets described below under ldquoInvestment Restrictionsrdquo
16 The Fund currently anticipates investing only in registered open-end investment companies that are listed and traded in the US on registered exchanges (ie other ETFs) An ETF is an investment company registered under the 1940 Act that holds a portfolio of securities Many ETFs are designed to track the performance of a securities index including industry sector country and region indexes The Fund may invest in the securities of ETFs in excess of the limits imposed under the 1940 Act pursuant to exemptive orders obtained by other ETFs and their sponsors from the Commission In addition the Fund may invest in the securities of certain investment companies in excess of the limits imposed under the 1940 Act pursuant to an exemptive order obtained by the Trust and the Adviser from the Commission See Investment Company Act Release No 30377
SR-NASDAQ-2015-011 Amendment No 2 Page 9 of 64
invest primarily in the foregoing types of debt instruments17 (collectively ldquoFloating Rate
Debt Instrumentsrdquo)
At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade To be considered
ldquoinvestment graderdquo under normal market conditions rated Floating Rate Debt
Instruments will carry at the time of purchase a rating in the highest four rating
categories of at least one nationally recognized statistical ratings organization
(ldquoNRSROrdquo) (eg BBB- or higher by Standard amp Poorrsquos Ratings Services (ldquoSampPrdquo)
andor Fitch Ratings (ldquoFitchrdquo) or Baa3 or higher by Moodyrsquos Investors Service Inc
(ldquoMoodyrsquosrdquo)18 For unrated securities to be considered ldquoinvestment graderdquo under normal
market conditions such securities will be determined at the time of purchase to be of
comparable quality19 by the Adviser The Fund may invest up to 35 of its net assets in
(February 5 2013) (File No 812-13895) The ETFs in which the Fund may invest include Index Fund Shares (as described in Nasdaq Rule 5705) Portfolio Depository Receipts (as described in Nasdaq Rule 5705) and Managed Fund Shares (as described in Nasdaq Rule 5735) While the Fund may invest in inverse ETFs the Fund will not invest in leveraged or inverse leveraged (eg 2X or -3X) ETFs
17 The liquidity of a security especially in the case of asset-backed and mortgage-backed securities will be a substantial factor in the Fundrsquos security selection process Consistent with the discussion below under ldquoInvestment Restrictionsrdquo the Fund will not purchase any Floating Rate Debt Instruments (including asset-backed securities and mortgage-backed securities) that in the Adviserrsquos opinion are illiquid if as a result more than 15 of the value of the Fundrsquos net assets will be invested in illiquid assets
18 For the avoidance of doubt if a security is rated by multiple NRSROs and receives different ratings the Fund will treat the security as being rated in the highest rating category received from an NRSRO
19 Comparable quality of unrated securities will be determined by the Adviser based on fundamental credit analysis of the unrated security and comparable NRSRO-rated securities On a best efforts basis the Adviser will attempt to make a rating
SR-NASDAQ-2015-011 Amendment No 2 Page 10 of 64
securities that are at the time of investment rated below investment grade by each
NRSRO rating such securities (or securities that are unrated and determined by the
Adviser to be of comparable quality) commonly referred to as ldquohigh yieldrdquo or ldquojunkrdquo
bonds If subsequent to purchase by the Fund a security held by the Fund experiences a
decline in credit quality and falls below investment grade the Fund may continue to hold
the security and it will not cause the Fund to violate the 35 investment limitation
however the security will be taken into account for purposes of determining whether
purchases of additional securities will cause the Fund to violate such limitation
The Fund will limit its investments in asset-backed securities (excluding agency
mortgage-backed securities) and non-agency mortgage-backed securities (in the
aggregate) to 20 of its net assets20 In addition the Fund will limit its investments in
junior loans to 20 of its net assets
The Fund will hold debt securities (including in the aggregate Floating Rate
Debt Instruments and the fixed-rate debt securities described below) of at least 13
non-affiliated issuers
Other Investments
Under normal market conditions the Fund will invest primarily in the Floating
Rate Debt Instruments described above to meet its investment objective In addition the
determination based on publicly available data In making a ldquocomparable qualityrdquo determination the Adviser may consider for example whether the issuer of the security has issued other rated securities the nature and provisions of the relevant security whether the obligations under the relevant security are guaranteed by another entity and the rating of such guarantor (if any) relevant cash flows macroeconomic analysis andor sector or industry analysis
For the avoidance of doubt there is no limitation on the Fundrsquos investments in agency mortgage-backed securities
20
SR-NASDAQ-2015-011 Amendment No 2 Page 11 of 64
Fund may invest up to 20 of its net assets in the following types of fixed-rate debt
securities corporate21 and government bonds and notes agency securities22 instruments
of non-US issuers in developed markets privately-issued securities 23 asset-backed
securities 24 mortgage-backed securities 25 municipal bonds money market securities26
and investment companies27 (including investment companies advised by the Adviser)
that invest primarily in the foregoing types of debt securities
Further to pursue its investment objective the Fund may invest up to 20 of the
value of its net assets in exchange-listed options on US Treasury futures contracts and
exchange-listed US Treasury futures contracts28 The use of these derivative
transactions may allow the Fund to obtain net long or short exposures to selected interest
rates These derivatives may also be used to hedge risks including interest rate risks and
21 See footnote 10 above
22 See footnote 11 above
23 See footnote 12 above
24 See footnote 13 above
25 See footnote 14 above
26 ldquoMoney market securitiesrdquo for these purposes generally includes short-term high-quality obligations issued or guaranteed by the US Treasury or the agencies or instrumentalities of the US government short-term high-quality securities issued or guaranteed by non-US governments agencies and instrumentalities repurchase agreements commercial paper (both asset-backed and non-assetshybacked) and deposits and other obligations of US and non-US banks and financial institutions
27 See footnote 16 above
28 At least 90 of the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be invested in instruments that trade in markets that are members of the Intermarket Surveillance Group (ldquoISGrdquo) (see footnote 40 below) or are parties to a comprehensive surveillance sharing agreement with the Exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 12 of 64
credit risks associated with the Fundrsquos portfolio investments The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index
Investment Restrictions
The Fund will not invest 25 or more of the value of its total assets in securities
of issuers in any one industry This restriction does not apply to (a) obligations issued or
guaranteed by the US government its agencies or instrumentalities or (b) securities of
other investment companies29
The Fund may hold up to an aggregate amount of 15 of its net assets in illiquid
assets (calculated at the time of investment) including Rule 144A securities deemed
illiquid by the Adviser30 The Fund will monitor its portfolio liquidity on an ongoing
basis to determine whether in light of current circumstances an adequate level of
liquidity is being maintained and will consider taking appropriate steps in order to
maintain adequate liquidity if through a change in values net assets or other
circumstances more than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid
assets include securities subject to contractual or other restrictions on resale and other
29 See Form N-1A Item 9 The Commission has taken the position that a fund is concentrated if it invests more than 25 of the value of its total assets in any one industry See eg Investment Company Act Release No 9011 (October 30 1975) 40 FR 54241 (November 21 1975)
30 In reaching liquidity decisions the Adviser may consider the following factors the frequency of trades and quotes for the security the number of dealers wishing to purchase or sell the security and the number of other potential purchasers dealer undertakings to make a market in the security and the nature of the security and the nature of the marketplace in which it trades (eg the time needed to dispose of the security the method of soliciting offers and the mechanics of transfer)
SR-NASDAQ-2015-011 Amendment No 2 Page 13 of 64
instruments that lack readily available markets as determined in accordance with
Commission staff guidance31
The Fund will not invest in non-US equity securities
Creation and Redemption of Shares
The Fund will issue and redeem Shares on a continuous basis at net asset value
(ldquoNAVrdquo)32 only in large blocks of Shares (ldquoCreation Unitsrdquo) in transactions with
authorized participants generally including broker-dealers and large institutional
investors (ldquoAuthorized Participantsrdquo) Creation Units generally will consist of 50000
Shares although this may change from time to time Creation Units however are not
expected to consist of less than 50000 Shares As described in the Registration
Statement and consistent with the Exemptive Relief the Fund will issue and redeem
Creation Units in exchange for an in-kind portfolio of instruments andor cash in lieu of
31 The Commission has stated that long-standing Commission guidelines have required open-end funds to hold no more than 15 of their net assets in illiquid securities and other illiquid assets See Investment Company Act Release No 28193 (March 11 2008) 73 FR 14618 (March 18 2008) footnote 34 See also Investment Company Act Release No 5847 (October 21 1969) 35 FR 19989 (December 31 1970) (Statement Regarding ldquoRestricted Securitiesrdquo) Investment Company Act Release No 18612 (March 12 1992) 57 FR 9828 (March 20 1992) (Revisions of Guidelines to Form N-1A) A fundrsquos portfolio security is illiquid if it cannot be disposed of in the ordinary course of business within seven days at approximately the value ascribed to it by the fund See Investment Company Act Release No 14983 (March 12 1986) 51 FR 9773 (March 21 1986) (adopting amendments to Rule 2a-7 under the 1940 Act) Investment Company Act Release No 17452 (April 23 1990) 55 FR 17933 (April 30 1990) (adopting Rule 144A under the Securities Act of 1933)
32 The NAV of the Fundrsquos Shares generally will be calculated once daily Monday through Friday as of the close of regular trading on the New York Stock Exchange generally 400 pm Eastern Time (the ldquoNAV Calculation Timerdquo) NAV per Share will be calculated by dividing the Fundrsquos net assets by the number of Fund Shares outstanding For more information regarding the valuation of Fund investments in calculating the Fundrsquos NAV see the Registration Statement
SR-NASDAQ-2015-011 Amendment No 2 Page 14 of 64
such instruments (the ldquoCreation Basketrdquo) In addition if there is a difference between the
NAV attributable to a Creation Unit and the market value of the Creation Basket
exchanged for the Creation Unit the party conveying instruments with the lower value
will pay to the other an amount in cash equal to the difference (referred to as the ldquoCash
Componentrdquo)
Creations and redemptions must be made by or through an Authorized Participant
that has executed an agreement that has been agreed to by the Distributor and BNY with
respect to creations and redemptions of Creation Units All standard orders to create
Creation Units must be received by the transfer agent no later than the closing time of the
regular trading session on the New York Stock Exchange (ordinarily 400 pm Eastern
Time) (the ldquoClosing Timerdquo) in each case on the date such order is placed in order for the
creation of Creation Units to be effected based on the NAV of Shares as next determined
on such date after receipt of the order in proper form Shares may be redeemed only in
Creation Units at their NAV next determined after receipt not later than the Closing Time
of a redemption request in proper form by the Fund through the transfer agent and only
on a business day
The Fundrsquos custodian through the National Securities Clearing Corporation will
make available on each business day prior to the opening of business of the Exchange
the list of the names and quantities of the instruments comprising the Creation Basket as
well as the estimated Cash Component (if any) for that day The published Creation
Basket will apply until a new Creation Basket is announced on the following business
day prior to commencement of trading in the Shares
SR-NASDAQ-2015-011 Amendment No 2 Page 15 of 64
Net Asset Value
The Fundrsquos NAV will be determined as of the close of trading (normally
400 pm Eastern Time) on each day the New York Stock Exchange is open for
business NAV will be calculated for the Fund by taking the market price of the Fundrsquos
total assets including interest or dividends accrued but not yet collected less all
liabilities and dividing such amount by the total number of Shares outstanding The
result rounded to the nearest cent will be the NAV per Share All valuations will be
subject to review by the Board of Trustees of the Trust (ldquoTrust Boardrdquo) or its delegate
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with valuation procedures (which may be revised from time to time) adopted by the Trust
Board (the ldquoValuation Proceduresrdquo) and in accordance with the 1940 Act A market
valuation generally means a valuation (i) obtained from an exchange an independent
pricing service (ldquoPricing Servicerdquo) or a major market maker (or dealer) or (ii) based on a
price quotation or other equivalent indication of value supplied by an exchange a Pricing
Service or a major market maker (or dealer) The information summarized below is
based on the Valuation Procedures as currently in effect however as noted above the
Valuation Procedures are amended from time to time and therefore such information is
subject to change
Certain securities including Floating Rate Debt Instruments in which the Fund
may invest will not be listed on any securities exchange or board of trade Such
securities will typically be bought and sold by institutional investors in individually
negotiated private transactions that function in many respects like an over-the-counter
SR-NASDAQ-2015-011 Amendment No 2 Page 16 of 64
secondary market although typically no formal market makers will exist Certain
securities particularly debt securities will have few or no trades or trade infrequently
and information regarding a specific security may not be widely available or may be
incomplete Accordingly determinations of the fair value of debt securities may be
based on infrequent and dated information Because there is less reliable objective data
available elements of judgment may play a greater role in valuation of debt securities
than for other types of securities Typically Floating Rate Debt Instruments and other
debt securities in which the Fund may invest (other than those described below) will be
valued using information provided by a Pricing Service Debt securities having a
remaining maturity of 60 days or less when purchased will be valued at cost adjusted for
amortization of premiums and accretion of discounts provided the Adviserrsquos pricing
committee (the ldquoPricing Committeerdquo) has determined that the use of amortized cost is an
appropriate reflection of fair value given market and issuer-specific conditions existing at
the time of the determination Overnight repurchase agreements will be valued at cost
and term repurchase agreements (ie those whose maturity exceeds seven days) will be
valued at the average of the bid quotations obtained daily from at least two recognized
dealers
Asset-backed and mortgage-backed securities will generally be valued by using a
Pricing Service If a Pricing Service does not cover a particular asset-backed or
mortgage-backed security or discontinues covering a particular asset-backed or
mortgage-backed security the security will be priced using broker quotes generally
provided by brokers that make or participate in markets in the security To derive values
Pricing Services and broker-dealers may use matrix pricing and valuation models as well
SR-NASDAQ-2015-011 Amendment No 2 Page 17 of 64
as recent market transactions for the same or similar assets As it deems appropriate the
Pricing Committee may determine that a Pricing Service price does not represent an
accurate value of an asset-backed or mortgage-backed security based on broker quotes it
receives a recent trade in the security by the Fund information from a portfolio manager
or other market information In the event that the Pricing Committee determines that the
Pricing Service price is unreliable or inaccurate based on such other information broker
quotes may be used Additionally if the Pricing Committee determines that the price of
an asset-backed or mortgage-backed security obtained from a Pricing Service and
available broker quotes is unreliable or inaccurate due to market conditions or other
reasons or if a Pricing Service price or broker quote is unavailable the security will be
valued using fair value pricing as described below
Equity securities listed on any exchange other than the Exchange will be valued at
the last sale price on the exchange on which they are principally traded on the business
day as of which such value is being determined Equity securities listed on the Exchange
will be valued at the official closing price on the business day as of which such value is
being determined If there has been no sale on such day or no official closing price in
the case of securities traded on the Exchange the securities will be valued using fair
value pricing as described below Equity securities traded on more than one securities
exchange will be valued at the last sale price or official closing price as applicable on
the business day as of which such value is being determined at the close of the exchange
representing the principal market for such securities
Exchange-traded options and futures contracts will be valued at the closing price
in the market where such contracts are principally traded
SR-NASDAQ-2015-011 Amendment No 2 Page 18 of 64
Certain securities including Floating Rate Debt Instruments in which the Fund
will invest will not be able to be priced by pre-established pricing methods Such
securities may be valued by the Trust Board or its delegate at fair value The use of fair
value pricing by the Fund will be governed by the Valuation Procedures and conducted in
accordance with the provisions of the 1940 Act Valuing the Fundrsquos securities using fair
value pricing will result in using prices for those securities that may differ from current
market valuations or official closing prices on the applicable exchange
Availability of Information
The Fundrsquos website (wwwftportfolioscom) which will be publicly available
prior to the public offering of Shares will include a form of the prospectus for the Fund
that may be downloaded The website will include the Sharesrsquo ticker CUSIP and
exchange information along with additional quantitative information updated on a daily
basis including for the Fund (1) daily trading volume the prior business dayrsquos reported
NAV and closing price mid-point of the bidask spread at the time of calculation of such
NAV (the ldquoBidAsk Pricerdquo)33 and a calculation of the premium and discount of the
BidAsk Price against the NAV and (2) data in chart format displaying the frequency
distribution of discounts and premiums of the daily BidAsk Price against the NAV
within appropriate ranges for each of the four previous calendar quarters On each
business day before commencement of trading in Shares in the Regular Market Session34
33 The BidAsk Price of the Fund will be determined using the mid-point of the highest bid and the lowest offer on the Exchange as of the time of calculation of the Fundrsquos NAV The records relating to BidAsk Prices will be retained by the Fund and its service providers
34 See Nasdaq Rule 4120(b)(4) (describing the three trading sessions on the Exchange (1) Pre-Market Session from 4 am to 930 am Eastern Time (2)
SR-NASDAQ-2015-011 Amendment No 2 Page 19 of 64
on the Exchange the Fund will disclose on its website the identities and quantities of the
portfolio of securities and other assets (the ldquoDisclosed Portfoliordquo as defined in Nasdaq
Rule 5735(c)(2)) held by the Fund that will form the basis for the Fundrsquos calculation of
NAV at the end of the business day 35 The Fundrsquos disclosure of derivative positions in
the Disclosed Portfolio will include information that market participants can use to value
these positions intraday On a daily basis the Fund will disclose on the Fundrsquos website
the following information regarding each portfolio holding as applicable to the type of
holding ticker symbol CUSIP number or other identifier if any a description of the
holding (including the type of holding) the identity of the security or other asset or
instrument underlying the holding if any for options the option strike price quantity
held (as measured by for example par value notional value or number of shares
contracts or units) maturity date if any coupon rate if any effective date if any market
value of the holding and percentage weighting of the holding in the Fundrsquos portfolio
The website information will be publicly available at no charge
In addition for the Fund an estimated value defined in Rule 5735(c)(3) as the
ldquoIntraday Indicative Valuerdquo that reflects an estimated intraday value of the Fundrsquos
Disclosed Portfolio will be disseminated Moreover the Intraday Indicative Value
Regular Market Session from 930 am to 4 pm or 415 pm Eastern Time and (3) Post-Market Session from 4 pm or 415 pm to 8 pm Eastern Time)
Under accounting procedures to be followed by the Fund trades made on the prior business day (ldquoTrdquo) will be booked and reflected in NAV on the current business day (ldquoT+1rdquo) Accordingly the Fund will be able to disclose at the beginning of the business day the portfolio that will form the basis for the NAV calculation at the end of the business day
35
SR-NASDAQ-2015-011 Amendment No 2 Page 20 of 64
available on the NASDAQ OMX Information LLC proprietary index data service36 will
be based upon the current value for the components of the Disclosed Portfolio and will be
updated and widely disseminated by one or more major market data vendors and broadly
displayed at least every 15 seconds during the Regular Market Session The Intraday
Indicative Value will be based on quotes and closing prices from the securitiesrsquo local
market and may not reflect events that occur subsequent to the local marketrsquos close
Premiums and discounts between the Intraday Indicative Value and the market price may
occur This should not be viewed as a ldquoreal timerdquo update of the NAV per Share of the
Fund which is calculated only once a day
The dissemination of the Intraday Indicative Value together with the Disclosed
Portfolio will allow investors to determine the value of the underlying portfolio of the
Fund on a daily basis and will provide a close estimate of that value throughout the
trading day
Investors will also be able to obtain the Fundrsquos Statement of Additional
Information (ldquoSAIrdquo) the Fundrsquos annual and semi-annual reports (together ldquoShareholder
Reportsrdquo) and its Form N-CSR and Form N-SAR filed twice a year The Fundrsquos SAI
and Shareholder Reports will be available free upon request from the Fund and those
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or
downloaded from the Commissionrsquos website at wwwsecgov Information regarding
market price and trading volume of the Shares will be continually available on a real-time
Currently the NASDAQ OMX Global Index Data Service (ldquoGIDSrdquo) is the NASDAQ OMX global index data feed service offering real-time updates daily summary messages and access to widely followed indexes and Intraday Indicative Values for ETFs GIDS provides investment professionals with the daily information needed to track or trade NASDAQ OMX indexes listed ETFs or third-party partner indexes and ETFs
36
SR-NASDAQ-2015-011 Amendment No 2 Page 21 of 64
basis throughout the day on brokersrsquo computer screens and other electronic services
Information regarding the previous dayrsquos closing price and trading volume information
for the Shares will be published daily in the financial section of newspapers Quotation
and last sale information for the Shares will be available via Nasdaq proprietary quote
and trade services as well as in accordance with the Unlisted Trading Privileges and the
Consolidated Tape Association (ldquoCTArdquo) plans for the Shares Quotation and last sale
information for the other ETFs in which the Fund will invest will be available via the
quote and trade services of their respective primary exchanges as well as in accordance
with the Unlisted Trading Privileges and the CTA plans as applicable Quotation and
last sale information for US exchange-traded options will be available via the Options
Price Reporting Authority Intraday executable price quotations on Floating Rate Debt
Instruments and other assets not traded on an exchange will be available from major
broker-dealer firms or market data vendors as well as from automated quotation systems
published or other public sources or online information services Additionally the Trade
Reporting and Compliance Engine (ldquoTRACErdquo) of the Financial Industry Regulatory
Authority (ldquoFINRArdquo) will be a source of price information for corporate bonds
privately-issued securities mortgage-backed securities and asset-backed securities to the
extent transactions in such securities are reported to TRACE37 For exchange-traded
assets intraday pricing information will be available directly from the applicable listing
exchange
Broker-dealers that are FINRA member firms have an obligation to report transactions in specified debt securities to TRACE to the extent required under applicable FINRA rules Generally such debt securities will have at issuance a maturity that exceeds one calendar year
37
SR-NASDAQ-2015-011 Amendment No 2 Page 22 of 64
Additional information regarding the Fund and the Shares including investment
strategies risks creation and redemption procedures fees Fund holdings disclosure
policies distributions and taxes will be included in the Registration Statement
Initial and Continued Listing
The Shares will be subject to Rule 5735 which sets forth the initial and continued
listing criteria applicable to Managed Fund Shares The Exchange represents that for
initial andor continued listing the Fund must be in compliance with Rule 10A-338 under
the Act A minimum of 100000 Shares will be outstanding at the commencement of
trading on the Exchange The Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the NAV and the
Disclosed Portfolio will be made available to all market participants at the same time
Trading Halts
With respect to trading halts the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading in the Shares of the Fund Nasdaq will
halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12) Trading may be
halted because of market conditions or for reasons that in the view of the Exchange
make trading in the Shares inadvisable These may include (1) the extent to which
trading is not occurring in the securities andor the other assets constituting the Disclosed
Portfolio of the Fund or (2) whether other unusual conditions or circumstances
detrimental to the maintenance of a fair and orderly market are present Trading in the
See 17 CFR 24010A-3 38
SR-NASDAQ-2015-011 Amendment No 2 Page 23 of 64
Shares also will be subject to Rule 5735(d)(2)(D) which sets forth circumstances under
which Shares of the Fund may be halted
Trading Rules
Nasdaq deems the Shares to be equity securities thus rendering trading in the
Shares subject to Nasdaqrsquos existing rules governing the trading of equity securities
Nasdaq will allow trading in the Shares from 400 am until 800 pm Eastern Time
The Exchange has appropriate rules to facilitate transactions in the Shares during all
trading sessions As provided in Nasdaq Rule 5735(b)(3) the minimum price variation
for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $001
Surveillance
The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws39 The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities laws
The surveillances referred to above generally focus on detecting securities trading
outside their normal patterns which could be indicative of manipulative or other violative
activity When such situations are detected surveillance analysis follows and
investigations are opened where appropriate to review the behavior of all relevant
parties for all relevant trading violations
FINRA surveils trading on the Exchange pursuant to a regulatory services agreement The Exchange is responsible for FINRArsquos performance under this regulatory services agreement
39
SR-NASDAQ-2015-011 Amendment No 2 Page 24 of 64
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 25 of 64
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
b Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
SR-NASDAQ-2015-011 Amendment No 2 Page 26 of 64
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
SR-NASDAQ-2015-011 Amendment No 2 Page 27 of 64
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
SR-NASDAQ-2015-011 Amendment No 2 Page 28 of 64
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
SR-NASDAQ-2015-011 Amendment No 2 Page 29 of 64
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
SR-NASDAQ-2015-011 Amendment No 2 Page 30 of 64
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
SR-NASDAQ-2015-011 Amendment No 2 Page 31 of 64
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
4 Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
5 Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received from Members Participants or Others
Written comments were neither solicited nor received
6 Extension of Time Period for Commission Action
The Exchange does not consent at this time to an extension of any time period for
Commission action
7 Basis for Summary Effectiveness Pursuant to Section 19(b)(3) or for Accelerated Effectiveness Pursuant to Section 19(b)(2)
Not applicable
8 Proposed Rule Change Based on Rules of Another Self-Regulatory Organization or of the Commission
Not applicable
9 Security-Based Swap Submissions Filed Pursuant to Section 3C of the Act
Not applicable
SR-NASDAQ-2015-011 Amendment No 2 Page 32 of 64
10 Advance Notices Filed Pursuant to Section 806(e) of the Payment Clearing and Settlement Supervision Act
Not applicable
11 Exhibits
1 Completed notice of proposed rule change for publication in the Federal
Register
SR-NASDAQ-2015-011 Amendment No 2 Page 33 of 64
EXHIBIT 1
SECURITIES AND EXCHANGE COMMISSION (Release No 34shy File No SR-NASDAQ-2015-011)
April __ 2015
Self-Regulatory Organizations The NASDAQ Stock Market LLC Notice of Filing of Proposed Rule Change Relating to the Listing and Trading of the Shares of the First Trust Strategic Floating Rate ETF of First Trust Exchange-Traded Fund IV
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (ldquoActrdquo)1 and
Rule 19b-4 thereunder2 notice is hereby given that on February 12 2015 The NASDAQ
Stock Market LLC (ldquoNasdaqrdquo or the ldquoExchangerdquo) filed with the Securities and Exchange
Commission (ldquoCommissionrdquo) the proposed rule change as described in in Items I II and
III below which Items have been prepared by Nasdaq On April 6 2015 Nasdaq filed
Amendment No 1 which replaced the text of the original filing in its entirety On April
15 2015 Nasdaq filed Amendment No 2 which replaced the text of the original filing in
its entirety The Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons
I Self-Regulatory Organizationrsquos Statement of the Terms of Substance of the Proposed Rule Change
Nasdaq proposes to list and trade the shares of the First Trust Strategic Floating
Rate ETF (the ldquoFundrdquo) of the First Trust Strategic Floating Rate ETF (the ldquoFundrdquo) of
First Trust Exchange-Traded Fund IV (the ldquoTrustrdquo) under Nasdaq Rule 5735 (ldquoManaged
1 15 USC 78s(b)(1)
2 17 CFR 24019b-4
SR-NASDAQ-2015-011 Amendment No 2 Page 34 of 64
Fund Sharesrdquo)3 The shares of the Fund are collectively referred to herein as the
ldquoSharesrdquo
The text of the proposed rule change is available at
httpnasdaqcchwallstreetcom at Nasdaqrsquos principal office and at the Commissionrsquos
Public Reference Room
II Self-Regulatory Organizationrsquos Statement of the Purpose of and Statutory Basis for the Proposed Rule Change
In its filing with the Commission Nasdaq included statements concerning the
purpose of and basis for the proposed rule change The text of these statements may be
examined at the places specified in Item IV below Nasdaq has prepared summaries set
forth in Sections A B and C below of the most significant aspects of such statements
A Self-Regulatory Organizationrsquos Statement of the Purpose of and Statutory Basis for the Proposed Rule Change
1 Purpose
The Exchange proposes to list and trade the Shares of the Fund under Nasdaq
Rule 5735 which governs the listing and trading of Managed Fund Shares4 on the
3 The Commission approved Nasdaq Rule 5735 in Securities Exchange Act Release No 57962 (June 13 2008) 73 FR 35175 (June 20 2008) (SR-NASDAQ-2008shy039) There are already multiple actively-managed funds listed on the Exchange see eg Securities Exchange Act Release Nos 69464 (April 26 2013) 78 FR 25774 (May 2 2013) (SR-NASDAQ-2013-036) (order approving listing and trading of First Trust Senior Loan Fund) 68972 (February 22 2013) 78 FR 13721 (February 28 2013) (SR-NASDAQ-2012-147) (order approving listing and trading of First Trust High Yield LongShort ETF) 66489 (February 29 2012) 77 FR 13379 (March 6 2012) (SR-NASDAQ-2012-004) (order approving listing and trading of WisdomTree Emerging Markets Corporate Bond Fund) The Exchange believes the proposed rule change raises no significant issues not previously addressed in those prior Commission orders
4 A Managed Fund Share is a security that represents an interest in an investment company registered under the Investment Company Act of 1940 (15 USC 80ashy
SR-NASDAQ-2015-011 Amendment No 2 Page 35 of 64
Exchange The Fund will be an actively-managed exchange-traded fund (ldquoETFrdquo) The
Shares will be offered by the Trust which was established as a Massachusetts business
trust on September 15 20105 The Trust is registered with the Commission as an
investment company and has filed a registration statement on Form N-1A (ldquoRegistration
Statementrdquo) with the Commission6 The Fund will be a series of the Trust The Fund
intends to qualify each year as a regulated investment company (ldquoRICrdquo) under
Subchapter M of the Internal Revenue Code of 1986 as amended
First Trust Advisors LP will be the investment adviser (ldquoAdviserrdquo) to the Fund
First Trust Portfolios LP (the ldquoDistributorrdquo) will be the principal underwriter and
distributor of the Fundrsquos Shares The Bank of New York Mellon Corporation (ldquoBNYrdquo)
will act as the administrator accounting agent custodian and transfer agent to the Fund
1) (the ldquo1940 Actrdquo) organized as an open-end investment company or similar entity that invests in a portfolio of securities selected by its investment adviser consistent with its investment objectives and policies In contrast an open-end investment company that issues Index Fund Shares listed and traded on the Exchange under Nasdaq Rule 5705 seeks to provide investment results that correspond generally to the price and yield performance of a specific foreign or domestic stock index fixed income securities index or combination thereof
5 The Commission has issued an order upon which the Trust may rely granting certain exemptive relief under the 1940 Act See Investment Company Act Release No 30029 (April 10 2012) (File No 812-13795) (the ldquoExemptive Reliefrdquo) In addition the Commission has issued no-action relief upon which the Trust may rely pertaining to the Fundrsquos ability to invest in derivatives notwithstanding certain representations in the application for the Exemptive Relief See Commission No-Action Letter (December 6 2012)
6 See Post-Effective Amendment No 104 to Registration Statement on Form N-1A for the Trust dated January 29 2015 (File Nos 333-174332 and 811-22559) The descriptions of the Fund and the Shares contained herein are based in part on information in the Registration Statement
7
SR-NASDAQ-2015-011 Amendment No 2 Page 36 of 64
Paragraph (g) of Rule 5735 provides that if the investment adviser to the
investment company issuing Managed Fund Shares is affiliated with a broker-dealer
such investment adviser shall erect a ldquofire wallrdquo between the investment adviser and the
broker-dealer with respect to access to information concerning the composition andor
changes to such investment company portfolio7 In addition paragraph (g) further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio Rule 5735(g) is similar
to Nasdaq Rule 5705(b)(5)(A)(i) however paragraph (g) in connection with the
establishment of a ldquofire wallrdquo between the investment adviser and the broker-dealer
reflects the applicable open-end fundrsquos portfolio not an underlying benchmark index as
is the case with index-based funds The Adviser is not a broker-dealer although it is
affiliated with the Distributor a broker-dealer The Adviser has implemented a fire wall
An investment adviser to an open-end fund is required to be registered under the Investment Advisers Act of 1940 (the ldquoAdvisers Actrdquo) As a result the Adviser and its related personnel are subject to the provisions of Rule 204A-1 under the Advisers Act relating to codes of ethics This Rule requires investment advisers to adopt a code of ethics that reflects the fiduciary nature of the relationship to clients as well as compliance with other applicable securities laws Accordingly procedures designed to prevent the communication and misuse of non-public information by an investment adviser must be consistent with Rule 204A-1 under the Advisers Act In addition Rule 206(4)-7 under the Advisers Act makes it unlawful for an investment adviser to provide investment advice to clients unless such investment adviser has (i) adopted and implemented written policies and procedures reasonably designed to prevent violation by the investment adviser and its supervised persons of the Advisers Act and the Commission rules adopted thereunder (ii) implemented at a minimum an annual review regarding the adequacy of the policies and procedures established pursuant to subparagraph (i) above and the effectiveness of their implementation and (iii) designated an individual (who is a supervised person) responsible for administering the policies and procedures adopted under subparagraph (i) above
8
SR-NASDAQ-2015-011 Amendment No 2 Page 37 of 64
with respect to its broker-dealer affiliate regarding access to information concerning the
composition andor changes to the portfolio In addition personnel who make decisions
on the Fundrsquos portfolio composition will be subject to procedures designed to prevent the
use and dissemination of material non-public information regarding the Fundrsquos portfolio
In the event (a) the Adviser becomes or becomes newly affiliated with a broker-dealer
or (b) any new adviser or sub-adviser is a registered broker-dealer or becomes affiliated
with another broker-dealer it will implement a fire wall with respect to its relevant
personnel andor such broker-dealer affiliate as applicable regarding access to
information concerning the composition andor changes to the portfolio and will be
subject to procedures designed to prevent the use and dissemination of material
non-public information regarding such portfolio The Fund does not currently intend to
use a sub-adviser
First Trust Strategic Floating Rate ETF
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions8 at least 80 of its
The term ldquounder normal market conditionsrdquo as used herein includes but is not limited to the absence of adverse market economic political or other conditions including extreme volatility or trading halts in the fixed income markets or the financial markets generally operational issues causing dissemination of inaccurate market information or force majeure type events such as systems failure natural or man-made disaster act of God armed conflict act of terrorism riot or labor disruption or any similar intervening circumstance For temporary defensive purposes during the initial invest-up period and during periods of high cash inflows or outflows the Fund may depart from its principal investment strategies for example it may hold a higher than normal proportion of its assets in cash During such periods the Fund may not be able to achieve its investment objective The Fund may adopt a defensive strategy when the Adviser believes securities in which the Fund normally invests have elevated risks due to political or economic factors and in other extraordinary circumstances
SR-NASDAQ-2015-011 Amendment No 2 Page 38 of 64
net assets in a portfolio of the following types of floating-rate9 debt instruments issued by
US and non-US public- and private-sector entities floating-rate corporate10 and
government bonds and notes floating-rate agency securities 11 floating-rate instruments
of non-US issuers floating-rate privately-issued securities 12 floating-rate asset-backed
securities 13 floating-rate mortgage-backed securities14 floating-rate loans 15 and
9 For the avoidance of doubt the term ldquofloating-raterdquo shall also include similar terms such as ldquovariable-raterdquo and ldquoadjustable-raterdquo
10 The Adviser expects that under normal market conditions generally for a corporate bond to be considered as an eligible investment after taking into account such an investment at least 75 of the Fundrsquos net assets that are invested in floating-rate corporate bonds and as described below fixed-rate corporate bonds (in the aggregate) will be comprised of corporate bonds that have at the time of original issuance $100 million or more par amount outstanding
11 ldquoAgency securitiesrdquo for these purposes generally includes securities issued by the following entities Government National Mortgage Association (Ginnie Mae) Federal National Mortgage Association (Fannie Mae) Federal Home Loan Banks (FHLBanks) Federal Home Loan Mortgage Corporation (Freddie Mac) Farm Credit System (FCS) Farm Credit Banks (FCBanks) Student Loan Marketing Association (Sallie Mae) Resolution Funding Corporation (REFCORP) Financing Corporation (FICO) and the Farm Credit System (FCS) Financial Assistance Corporation (FAC) Agency securities can include but are not limited to mortgage-backed securities
12 ldquoPrivately-issued securitiesrdquo for these purposes generally includes Rule 144A securities other than mortgage-backed Rule 144A securities Under normal market conditions privately-issued securities will have at the time of original issuance $100 million or more principal amount outstanding to be considered eligible investments
13 Asset-backed securities are securities that are backed by a pool of assets The Fund currently intends to invest in asset-backed securities that are consumer asset-backed securities
14 Mortgage-backed securities which are securities that directly or indirectly represent a participation in or are secured by and payable from mortgage loans on real property will consist of (1) residential mortgage-backed securities (ldquoRMBSrdquo) (2) commercial mortgage-backed securities (ldquoCMBSrdquo) (3) stripped mortgage-backed securities (ldquoSMBSrdquo) which are mortgage-backed securities
SR-NASDAQ-2015-011 Amendment No 2 Page 39 of 64
investment companies16 (including investment companies advised by the Adviser) that
invest primarily in the foregoing types of debt instruments17 (collectively ldquoFloating Rate
Debt Instrumentsrdquo)
where mortgage payments are divided between paying the loanrsquos principal and paying the loanrsquos interest (4) collateralized mortgage obligations (ldquoCMOsrdquo) and real estate mortgage investment conduits (ldquoREMICsrdquo) which are mortgage-backed securities that are divided into multiple classes with each class being entitled to a different share of the principal and interest payments received from the pool of underlying assets
15 The floating-rate loans in which the Fund will invest will represent amounts borrowed by companies or other entities from banks and other lenders and a significant portion of such floating-rate loans may be rated below investment grade or unrated Floating-rate loans held by the Fund may be senior or subordinate obligations of the borrower and may or may not be secured by collateral First lien senior secured floating-rate loans are referred to herein as ldquosenior loansrdquo Floating-rate loans that are not senior loans (ie unsecured floating-rate loans and secured floating-rate loans that are not first lien floating-rate loans) are referred to herein as ldquojunior loansrdquo The Fund will generally invest in floating-rate loans that the Adviser deems to be liquid with readily available prices notwithstanding the foregoing the Fund may invest in floating-rate loans that are deemed illiquid so long as the Fund complies with the 15 limitation on investments of its net assets in illiquid assets described below under ldquoInvestment Restrictionsrdquo
16 The Fund currently anticipates investing only in registered open-end investment companies that are listed and traded in the US on registered exchanges (ie other ETFs) An ETF is an investment company registered under the 1940 Act that holds a portfolio of securities Many ETFs are designed to track the performance of a securities index including industry sector country and region indexes The Fund may invest in the securities of ETFs in excess of the limits imposed under the 1940 Act pursuant to exemptive orders obtained by other ETFs and their sponsors from the Commission In addition the Fund may invest in the securities of certain investment companies in excess of the limits imposed under the 1940 Act pursuant to an exemptive order obtained by the Trust and the Adviser from the Commission See Investment Company Act Release No 30377 (February 5 2013) (File No 812-13895) The ETFs in which the Fund may invest include Index Fund Shares (as described in Nasdaq Rule 5705) Portfolio Depository Receipts (as described in Nasdaq Rule 5705) and Managed Fund Shares (as described in Nasdaq Rule 5735) While the Fund may invest in inverse ETFs the Fund will not invest in leveraged or inverse leveraged (eg 2X or -3X) ETFs
SR-NASDAQ-2015-011 Amendment No 2 Page 40 of 64
At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade To be considered
ldquoinvestment graderdquo under normal market conditions rated Floating Rate Debt
Instruments will carry at the time of purchase a rating in the highest four rating
categories of at least one nationally recognized statistical ratings organization
(ldquoNRSROrdquo) (eg BBB- or higher by Standard amp Poorrsquos Ratings Services (ldquoSampPrdquo)
andor Fitch Ratings (ldquoFitchrdquo) or Baa3 or higher by Moodyrsquos Investors Service Inc
(ldquoMoodyrsquosrdquo)18 For unrated securities to be considered ldquoinvestment graderdquo under normal
market conditions such securities will be determined at the time of purchase to be of
comparable quality19 by the Adviser The Fund may invest up to 35 of its net assets in
securities that are at the time of investment rated below investment grade by each
NRSRO rating such securities (or securities that are unrated and determined by the
17 The liquidity of a security especially in the case of asset-backed and mortgage-backed securities will be a substantial factor in the Fundrsquos security selection process Consistent with the discussion below under ldquoInvestment Restrictionsrdquo the Fund will not purchase any Floating Rate Debt Instruments (including asset-backed securities and mortgage-backed securities) that in the Adviserrsquos opinion are illiquid if as a result more than 15 of the value of the Fundrsquos net assets will be invested in illiquid assets
18 For the avoidance of doubt if a security is rated by multiple NRSROs and receives different ratings the Fund will treat the security as being rated in the highest rating category received from an NRSRO
19 Comparable quality of unrated securities will be determined by the Adviser based on fundamental credit analysis of the unrated security and comparable NRSRO-rated securities On a best efforts basis the Adviser will attempt to make a rating determination based on publicly available data In making a ldquocomparable qualityrdquo determination the Adviser may consider for example whether the issuer of the security has issued other rated securities the nature and provisions of the relevant security whether the obligations under the relevant security are guaranteed by another entity and the rating of such guarantor (if any) relevant cash flows macroeconomic analysis andor sector or industry analysis
SR-NASDAQ-2015-011 Amendment No 2 Page 41 of 64
Adviser to be of comparable quality) commonly referred to as ldquohigh yieldrdquo or ldquojunkrdquo
bonds If subsequent to purchase by the Fund a security held by the Fund experiences a
decline in credit quality and falls below investment grade the Fund may continue to hold
the security and it will not cause the Fund to violate the 35 investment limitation
however the security will be taken into account for purposes of determining whether
purchases of additional securities will cause the Fund to violate such limitation
The Fund will limit its investments in asset-backed securities (excluding agency
mortgage-backed securities) and non-agency mortgage-backed securities (in the
aggregate) to 20 of its net assets20 In addition the Fund will limit its investments in
junior loans to 20 of its net assets
The Fund will hold debt securities (including in the aggregate Floating Rate
Debt Instruments and the fixed-rate debt securities described below) of at least 13
non-affiliated issuers
Other Investments
Under normal market conditions the Fund will invest primarily in the Floating
Rate Debt Instruments described above to meet its investment objective In addition the
Fund may invest up to 20 of its net assets in the following types of fixed-rate debt
securities corporate21 and government bonds and notes agency securities22 instruments
20 For the avoidance of doubt there is no limitation on the Fundrsquos investments in agency mortgage-backed securities
21 See footnote 10 above
22 See footnote 11 above
SR-NASDAQ-2015-011 Amendment No 2 Page 42 of 64
of non-US issuers in developed markets privately-issued securities 23 asset-backed
securities 24 mortgage-backed securities 25 municipal bonds money market securities26
and investment companies27 (including investment companies advised by the Adviser)
that invest primarily in the foregoing types of debt securities
Further to pursue its investment objective the Fund may invest up to 20 of the
value of its net assets in exchange-listed options on US Treasury futures contracts and
exchange-listed US Treasury futures contracts28 The use of these derivative
transactions may allow the Fund to obtain net long or short exposures to selected interest
rates These derivatives may also be used to hedge risks including interest rate risks and
credit risks associated with the Fundrsquos portfolio investments The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
23 See footnote 12 above
24 See footnote 13 above
25 See footnote 14 above
26 ldquoMoney market securitiesrdquo for these purposes generally includes short-term high-quality obligations issued or guaranteed by the US Treasury or the agencies or instrumentalities of the US government short-term high-quality securities issued or guaranteed by non-US governments agencies and instrumentalities repurchase agreements commercial paper (both asset-backed and non-assetshybacked) and deposits and other obligations of US and non-US banks and financial institutions
27 See footnote 16 above
28 At least 90 of the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be invested in instruments that trade in markets that are members of the Intermarket Surveillance Group (ldquoISGrdquo) (see footnote 40 below) or are parties to a comprehensive surveillance sharing agreement with the Exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 43 of 64
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index
Investment Restrictions
The Fund will not invest 25 or more of the value of its total assets in securities
of issuers in any one industry This restriction does not apply to (a) obligations issued or
guaranteed by the US government its agencies or instrumentalities or (b) securities of
other investment companies29
The Fund may hold up to an aggregate amount of 15 of its net assets in illiquid
assets (calculated at the time of investment) including Rule 144A securities deemed
illiquid by the Adviser30 The Fund will monitor its portfolio liquidity on an ongoing
basis to determine whether in light of current circumstances an adequate level of
liquidity is being maintained and will consider taking appropriate steps in order to
maintain adequate liquidity if through a change in values net assets or other
circumstances more than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid
assets include securities subject to contractual or other restrictions on resale and other
29 See Form N-1A Item 9 The Commission has taken the position that a fund is concentrated if it invests more than 25 of the value of its total assets in any one industry See eg Investment Company Act Release No 9011 (October 30 1975) 40 FR 54241 (November 21 1975)
30 In reaching liquidity decisions the Adviser may consider the following factors the frequency of trades and quotes for the security the number of dealers wishing to purchase or sell the security and the number of other potential purchasers dealer undertakings to make a market in the security and the nature of the security and the nature of the marketplace in which it trades (eg the time needed to dispose of the security the method of soliciting offers and the mechanics of transfer)
SR-NASDAQ-2015-011 Amendment No 2 Page 44 of 64
instruments that lack readily available markets as determined in accordance with
Commission staff guidance31
The Fund will not invest in non-US equity securities
Creation and Redemption of Shares
The Fund will issue and redeem Shares on a continuous basis at net asset value
(ldquoNAVrdquo)32 only in large blocks of Shares (ldquoCreation Unitsrdquo) in transactions with
authorized participants generally including broker-dealers and large institutional
investors (ldquoAuthorized Participantsrdquo) Creation Units generally will consist of 50000
Shares although this may change from time to time Creation Units however are not
expected to consist of less than 50000 Shares As described in the Registration
Statement and consistent with the Exemptive Relief the Fund will issue and redeem
Creation Units in exchange for an in-kind portfolio of instruments andor cash in lieu of
31 The Commission has stated that long-standing Commission guidelines have required open-end funds to hold no more than 15 of their net assets in illiquid securities and other illiquid assets See Investment Company Act Release No 28193 (March 11 2008) 73 FR 14618 (March 18 2008) footnote 34 See also Investment Company Act Release No 5847 (October 21 1969) 35 FR 19989 (December 31 1970) (Statement Regarding ldquoRestricted Securitiesrdquo) Investment Company Act Release No 18612 (March 12 1992) 57 FR 9828 (March 20 1992) (Revisions of Guidelines to Form N-1A) A fundrsquos portfolio security is illiquid if it cannot be disposed of in the ordinary course of business within seven days at approximately the value ascribed to it by the fund See Investment Company Act Release No 14983 (March 12 1986) 51 FR 9773 (March 21 1986) (adopting amendments to Rule 2a-7 under the 1940 Act) Investment Company Act Release No 17452 (April 23 1990) 55 FR 17933 (April 30 1990) (adopting Rule 144A under the Securities Act of 1933)
32 The NAV of the Fundrsquos Shares generally will be calculated once daily Monday through Friday as of the close of regular trading on the New York Stock Exchange generally 400 pm Eastern Time (the ldquoNAV Calculation Timerdquo) NAV per Share will be calculated by dividing the Fundrsquos net assets by the number of Fund Shares outstanding For more information regarding the valuation of Fund investments in calculating the Fundrsquos NAV see the Registration Statement
SR-NASDAQ-2015-011 Amendment No 2 Page 45 of 64
such instruments (the ldquoCreation Basketrdquo) In addition if there is a difference between the
NAV attributable to a Creation Unit and the market value of the Creation Basket
exchanged for the Creation Unit the party conveying instruments with the lower value
will pay to the other an amount in cash equal to the difference (referred to as the ldquoCash
Componentrdquo)
Creations and redemptions must be made by or through an Authorized Participant
that has executed an agreement that has been agreed to by the Distributor and BNY with
respect to creations and redemptions of Creation Units All standard orders to create
Creation Units must be received by the transfer agent no later than the closing time of the
regular trading session on the New York Stock Exchange (ordinarily 400 pm Eastern
Time) (the ldquoClosing Timerdquo) in each case on the date such order is placed in order for the
creation of Creation Units to be effected based on the NAV of Shares as next determined
on such date after receipt of the order in proper form Shares may be redeemed only in
Creation Units at their NAV next determined after receipt not later than the Closing Time
of a redemption request in proper form by the Fund through the transfer agent and only
on a business day
The Fundrsquos custodian through the National Securities Clearing Corporation will
make available on each business day prior to the opening of business of the Exchange
the list of the names and quantities of the instruments comprising the Creation Basket as
well as the estimated Cash Component (if any) for that day The published Creation
Basket will apply until a new Creation Basket is announced on the following business
day prior to commencement of trading in the Shares
SR-NASDAQ-2015-011 Amendment No 2 Page 46 of 64
Net Asset Value
The Fundrsquos NAV will be determined as of the close of trading (normally
400 pm Eastern Time) on each day the New York Stock Exchange is open for
business NAV will be calculated for the Fund by taking the market price of the Fundrsquos
total assets including interest or dividends accrued but not yet collected less all
liabilities and dividing such amount by the total number of Shares outstanding The
result rounded to the nearest cent will be the NAV per Share All valuations will be
subject to review by the Board of Trustees of the Trust (ldquoTrust Boardrdquo) or its delegate
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with valuation procedures (which may be revised from time to time) adopted by the Trust
Board (the ldquoValuation Proceduresrdquo) and in accordance with the 1940 Act A market
valuation generally means a valuation (i) obtained from an exchange an independent
pricing service (ldquoPricing Servicerdquo) or a major market maker (or dealer) or (ii) based on a
price quotation or other equivalent indication of value supplied by an exchange a Pricing
Service or a major market maker (or dealer) The information summarized below is
based on the Valuation Procedures as currently in effect however as noted above the
Valuation Procedures are amended from time to time and therefore such information is
subject to change
Certain securities including Floating Rate Debt Instruments in which the Fund
may invest will not be listed on any securities exchange or board of trade Such
securities will typically be bought and sold by institutional investors in individually
negotiated private transactions that function in many respects like an over-the-counter
SR-NASDAQ-2015-011 Amendment No 2 Page 47 of 64
secondary market although typically no formal market makers will exist Certain
securities particularly debt securities will have few or no trades or trade infrequently
and information regarding a specific security may not be widely available or may be
incomplete Accordingly determinations of the fair value of debt securities may be
based on infrequent and dated information Because there is less reliable objective data
available elements of judgment may play a greater role in valuation of debt securities
than for other types of securities Typically Floating Rate Debt Instruments and other
debt securities in which the Fund may invest (other than those described below) will be
valued using information provided by a Pricing Service Debt securities having a
remaining maturity of 60 days or less when purchased will be valued at cost adjusted for
amortization of premiums and accretion of discounts provided the Adviserrsquos pricing
committee (the ldquoPricing Committeerdquo) has determined that the use of amortized cost is an
appropriate reflection of fair value given market and issuer-specific conditions existing at
the time of the determination Overnight repurchase agreements will be valued at cost
and term repurchase agreements (ie those whose maturity exceeds seven days) will be
valued at the average of the bid quotations obtained daily from at least two recognized
dealers
Asset-backed and mortgage-backed securities will generally be valued by using a
Pricing Service If a Pricing Service does not cover a particular asset-backed or
mortgage-backed security or discontinues covering a particular asset-backed or
mortgage-backed security the security will be priced using broker quotes generally
provided by brokers that make or participate in markets in the security To derive values
Pricing Services and broker-dealers may use matrix pricing and valuation models as well
SR-NASDAQ-2015-011 Amendment No 2 Page 48 of 64
as recent market transactions for the same or similar assets As it deems appropriate the
Pricing Committee may determine that a Pricing Service price does not represent an
accurate value of an asset-backed or mortgage-backed security based on broker quotes it
receives a recent trade in the security by the Fund information from a portfolio manager
or other market information In the event that the Pricing Committee determines that the
Pricing Service price is unreliable or inaccurate based on such other information broker
quotes may be used Additionally if the Pricing Committee determines that the price of
an asset-backed or mortgage-backed security obtained from a Pricing Service and
available broker quotes is unreliable or inaccurate due to market conditions or other
reasons or if a Pricing Service price or broker quote is unavailable the security will be
valued using fair value pricing as described below
Equity securities listed on any exchange other than the Exchange will be valued at
the last sale price on the exchange on which they are principally traded on the business
day as of which such value is being determined Equity securities listed on the Exchange
will be valued at the official closing price on the business day as of which such value is
being determined If there has been no sale on such day or no official closing price in
the case of securities traded on the Exchange the securities will be valued using fair
value pricing as described below Equity securities traded on more than one securities
exchange will be valued at the last sale price or official closing price as applicable on
the business day as of which such value is being determined at the close of the exchange
representing the principal market for such securities
Exchange-traded options and futures contracts will be valued at the closing price
in the market where such contracts are principally traded
SR-NASDAQ-2015-011 Amendment No 2 Page 49 of 64
Certain securities including Floating Rate Debt Instruments in which the Fund
will invest will not be able to be priced by pre-established pricing methods Such
securities may be valued by the Trust Board or its delegate at fair value The use of fair
value pricing by the Fund will be governed by the Valuation Procedures and conducted in
accordance with the provisions of the 1940 Act Valuing the Fundrsquos securities using fair
value pricing will result in using prices for those securities that may differ from current
market valuations or official closing prices on the applicable exchange
Availability of Information
The Fundrsquos website (wwwftportfolioscom) which will be publicly available
prior to the public offering of Shares will include a form of the prospectus for the Fund
that may be downloaded The website will include the Sharesrsquo ticker CUSIP and
exchange information along with additional quantitative information updated on a daily
basis including for the Fund (1) daily trading volume the prior business dayrsquos reported
NAV and closing price mid-point of the bidask spread at the time of calculation of such
NAV (the ldquoBidAsk Pricerdquo)33 and a calculation of the premium and discount of the
BidAsk Price against the NAV and (2) data in chart format displaying the frequency
distribution of discounts and premiums of the daily BidAsk Price against the NAV
within appropriate ranges for each of the four previous calendar quarters On each
business day before commencement of trading in Shares in the Regular Market Session34
33 The BidAsk Price of the Fund will be determined using the mid-point of the highest bid and the lowest offer on the Exchange as of the time of calculation of the Fundrsquos NAV The records relating to BidAsk Prices will be retained by the Fund and its service providers
34 See Nasdaq Rule 4120(b)(4) (describing the three trading sessions on the Exchange (1) Pre-Market Session from 4 am to 930 am Eastern Time (2)
SR-NASDAQ-2015-011 Amendment No 2 Page 50 of 64
on the Exchange the Fund will disclose on its website the identities and quantities of the
portfolio of securities and other assets (the ldquoDisclosed Portfoliordquo as defined in Nasdaq
Rule 5735(c)(2)) held by the Fund that will form the basis for the Fundrsquos calculation of
NAV at the end of the business day 35 The Fundrsquos disclosure of derivative positions in
the Disclosed Portfolio will include information that market participants can use to value
these positions intraday On a daily basis the Fund will disclose on the Fundrsquos website
the following information regarding each portfolio holding as applicable to the type of
holding ticker symbol CUSIP number or other identifier if any a description of the
holding (including the type of holding) the identity of the security or other asset or
instrument underlying the holding if any for options the option strike price quantity
held (as measured by for example par value notional value or number of shares
contracts or units) maturity date if any coupon rate if any effective date if any market
value of the holding and percentage weighting of the holding in the Fundrsquos portfolio
The website information will be publicly available at no charge
In addition for the Fund an estimated value defined in Rule 5735(c)(3) as the
ldquoIntraday Indicative Valuerdquo that reflects an estimated intraday value of the Fundrsquos
Disclosed Portfolio will be disseminated Moreover the Intraday Indicative Value
Regular Market Session from 930 am to 4 pm or 415 pm Eastern Time and (3) Post-Market Session from 4 pm or 415 pm to 8 pm Eastern Time)
Under accounting procedures to be followed by the Fund trades made on the prior business day (ldquoTrdquo) will be booked and reflected in NAV on the current business day (ldquoT+1rdquo) Accordingly the Fund will be able to disclose at the beginning of the business day the portfolio that will form the basis for the NAV calculation at the end of the business day
35
SR-NASDAQ-2015-011 Amendment No 2 Page 51 of 64
available on the NASDAQ OMX Information LLC proprietary index data service36 will
be based upon the current value for the components of the Disclosed Portfolio and will be
updated and widely disseminated by one or more major market data vendors and broadly
displayed at least every 15 seconds during the Regular Market Session The Intraday
Indicative Value will be based on quotes and closing prices from the securitiesrsquo local
market and may not reflect events that occur subsequent to the local marketrsquos close
Premiums and discounts between the Intraday Indicative Value and the market price may
occur This should not be viewed as a ldquoreal timerdquo update of the NAV per Share of the
Fund which is calculated only once a day
The dissemination of the Intraday Indicative Value together with the Disclosed
Portfolio will allow investors to determine the value of the underlying portfolio of the
Fund on a daily basis and will provide a close estimate of that value throughout the
trading day
Investors will also be able to obtain the Fundrsquos Statement of Additional
Information (ldquoSAIrdquo) the Fundrsquos annual and semi-annual reports (together ldquoShareholder
Reportsrdquo) and its Form N-CSR and Form N-SAR filed twice a year The Fundrsquos SAI
and Shareholder Reports will be available free upon request from the Fund and those
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or
downloaded from the Commissionrsquos website at wwwsecgov Information regarding
Currently the NASDAQ OMX Global Index Data Service (ldquoGIDSrdquo) is the NASDAQ OMX global index data feed service offering real-time updates daily summary messages and access to widely followed indexes and Intraday Indicative Values for ETFs GIDS provides investment professionals with the daily information needed to track or trade NASDAQ OMX indexes listed ETFs or third-party partner indexes and ETFs
36
SR-NASDAQ-2015-011 Amendment No 2 Page 52 of 64
market price and trading volume of the Shares will be continually available on a real-time
basis throughout the day on brokersrsquo computer screens and other electronic services
Information regarding the previous dayrsquos closing price and trading volume information
for the Shares will be published daily in the financial section of newspapers Quotation
and last sale information for the Shares will be available via Nasdaq proprietary quote
and trade services as well as in accordance with the Unlisted Trading Privileges and the
Consolidated Tape Association (ldquoCTArdquo) plans for the Shares Quotation and last sale
information for the other ETFs in which the Fund will invest will be available via the
quote and trade services of their respective primary exchanges as well as in accordance
with the Unlisted Trading Privileges and the CTA plans as applicable Quotation and
last sale information for US exchange-traded options will be available via the Options
Price Reporting Authority Intraday executable price quotations on Floating Rate Debt
Instruments and other assets not traded on an exchange will be available from major
broker-dealer firms or market data vendors as well as from automated quotation systems
published or other public sources or online information services Additionally the Trade
Reporting and Compliance Engine (ldquoTRACErdquo) of the Financial Industry Regulatory
Authority (ldquoFINRArdquo) will be a source of price information for corporate bonds
privately-issued securities mortgage-backed securities and asset-backed securities to the
extent transactions in such securities are reported to TRACE37 For exchange-traded
Broker-dealers that are FINRA member firms have an obligation to report transactions in specified debt securities to TRACE to the extent required under applicable FINRA rules Generally such debt securities will have at issuance a maturity that exceeds one calendar year
37
SR-NASDAQ-2015-011 Amendment No 2 Page 53 of 64
assets intraday pricing information will be available directly from the applicable listing
exchange
Additional information regarding the Fund and the Shares including investment
strategies risks creation and redemption procedures fees Fund holdings disclosure
policies distributions and taxes will be included in the Registration Statement
Initial and Continued Listing
The Shares will be subject to Rule 5735 which sets forth the initial and continued
listing criteria applicable to Managed Fund Shares The Exchange represents that for
initial andor continued listing the Fund must be in compliance with Rule 10A-338 under
the Act A minimum of 100000 Shares will be outstanding at the commencement of
trading on the Exchange The Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the NAV and the
Disclosed Portfolio will be made available to all market participants at the same time
Trading Halts
With respect to trading halts the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading in the Shares of the Fund Nasdaq will
halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12) Trading may be
halted because of market conditions or for reasons that in the view of the Exchange
make trading in the Shares inadvisable These may include (1) the extent to which
trading is not occurring in the securities andor the other assets constituting the Disclosed
Portfolio of the Fund or (2) whether other unusual conditions or circumstances
See 17 CFR 24010A-3 38
SR-NASDAQ-2015-011 Amendment No 2 Page 54 of 64
detrimental to the maintenance of a fair and orderly market are present Trading in the
Shares also will be subject to Rule 5735(d)(2)(D) which sets forth circumstances under
which Shares of the Fund may be halted
Trading Rules
Nasdaq deems the Shares to be equity securities thus rendering trading in the
Shares subject to Nasdaqrsquos existing rules governing the trading of equity securities
Nasdaq will allow trading in the Shares from 400 am until 800 pm Eastern Time
The Exchange has appropriate rules to facilitate transactions in the Shares during all
trading sessions As provided in Nasdaq Rule 5735(b)(3) the minimum price variation
for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $001
Surveillance
The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws39 The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities laws
The surveillances referred to above generally focus on detecting securities trading
outside their normal patterns which could be indicative of manipulative or other violative
activity When such situations are detected surveillance analysis follows and
FINRA surveils trading on the Exchange pursuant to a regulatory services agreement The Exchange is responsible for FINRArsquos performance under this regulatory services agreement
39
SR-NASDAQ-2015-011 Amendment No 2 Page 55 of 64
investigations are opened where appropriate to review the behavior of all relevant
parties for all relevant trading violations
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 56 of 64
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
SR-NASDAQ-2015-011 Amendment No 2 Page 57 of 64
2 Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
SR-NASDAQ-2015-011 Amendment No 2 Page 58 of 64
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
SR-NASDAQ-2015-011 Amendment No 2 Page 59 of 64
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
SR-NASDAQ-2015-011 Amendment No 2 Page 60 of 64
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 61 of 64
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
SR-NASDAQ-2015-011 Amendment No 2 Page 62 of 64
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
B Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
C Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received From Members Participants or Others
Written comments were neither solicited nor received
III Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Within 45 days of the date of publication of this notice in the Federal Register or
within such longer period (i) as the Commission may designate up to 90 days of such date
if it finds such longer period to be appropriate and publishes its reasons for so finding or
(ii) as to which the Exchange consents the Commission shall (a) by order approve or
disapprove such proposed rule change or (b) institute proceedings to determine whether
the proposed rule change should be disapproved
SR-NASDAQ-2015-011 Amendment No 2 Page 63 of 64
IV Solicitation of Comments
Interested persons are invited to submit written data views and arguments
concerning the foregoing including whether the proposed rule change is consistent with
the Act Comments may be submitted by any of the following methods
Electronic comments
bull Use the Commissionrsquos Internet comment form
(httpwwwsecgovrulessroshtml) or
bull Send an e-mail to rule-commentssecgov Please include File Number
SR-NASDAQ-2015-011 on the subject line
Paper comments
bull Send paper comments in triplicate to Brent J Fields Secretary Securities and
Exchange Commission Station Place 100 F Street NE Washington DC
20549-9303
All submissions should refer to File Number SR-NASDAQ-2015-011 This file number
should be included on the subject line if e-mail is used To help the Commission process
and review your comments more efficiently please use only one method The
Commission will post all comments on the Commissionrsquos Internet website
httpwwwsecgovrulessroshtml
Copies of the submission all subsequent amendments all written statements with
respect to the proposed rule change that are filed with the Commission and all written
communications relating to the proposed rule change between the Commission and any
person other than those that may be withheld from the public in accordance with the
provisions of 5 USC 552 will be available for website viewing and printing in the
Commissionrsquos Public Reference Room 100 F Street NE Washington DC 20549 on
SR-NASDAQ-2015-011 Amendment No 2 Page 64 of 64
official business days between the hours of 1000 am and 300 pm Copies of the filing
also will be available for inspection and copying at the principal office of Nasdaq All
comments received will be posted without change the Commission does not edit
personal identifying information from submissions You should submit only information
that you wish to make available publicly
All submissions should refer to File Number SR-NASDAQ-2015-011 and should
be submitted on or before [insert date 21 days from publication in the Federal Register]
For the Commission by the Division of Trading and Markets pursuant to
delegated authority41
Kevin M OrsquoNeill Deputy Secretary
17 CFR 20030-3(a)(12) 41
SR-NASDAQ-2015-011 Amendment No 2 Page 7 of 64
net assets in a portfolio of the following types of floating-rate9 debt instruments issued by
US and non-US public- and private-sector entities floating-rate corporate10 and
government bonds and notes floating-rate agency securities 11 floating-rate instruments
of non-US issuers floating-rate privately-issued securities 12 floating-rate asset-backed
failure natural or man-made disaster act of God armed conflict act of terrorism riot or labor disruption or any similar intervening circumstance For temporary defensive purposes during the initial invest-up period and during periods of high cash inflows or outflows the Fund may depart from its principal investment strategies for example it may hold a higher than normal proportion of its assets in cash During such periods the Fund may not be able to achieve its investment objective The Fund may adopt a defensive strategy when the Adviser believes securities in which the Fund normally invests have elevated risks due to political or economic factors and in other extraordinary circumstances
9 For the avoidance of doubt the term ldquofloating-raterdquo shall also include similar terms such as ldquovariable-raterdquo and ldquoadjustable-raterdquo
10 The Adviser expects that under normal market conditions generally for a corporate bond to be considered as an eligible investment after taking into account such an investment at least 75 of the Fundrsquos net assets that are invested in floating-rate corporate bonds and as described below fixed-rate corporate bonds (in the aggregate) will be comprised of corporate bonds that have at the time of original issuance $100 million or more par amount outstanding
11 ldquoAgency securitiesrdquo for these purposes generally includes securities issued by the following entities Government National Mortgage Association (Ginnie Mae) Federal National Mortgage Association (Fannie Mae) Federal Home Loan Banks (FHLBanks) Federal Home Loan Mortgage Corporation (Freddie Mac) Farm Credit System (FCS) Farm Credit Banks (FCBanks) Student Loan Marketing Association (Sallie Mae) Resolution Funding Corporation (REFCORP) Financing Corporation (FICO) and the Farm Credit System (FCS) Financial Assistance Corporation (FAC) Agency securities can include but are not limited to mortgage-backed securities
12 ldquoPrivately-issued securitiesrdquo for these purposes generally includes Rule 144A securities other than mortgage-backed Rule 144A securities Under normal market conditions privately-issued securities will have at the time of original issuance $100 million or more principal amount outstanding to be considered eligible investments
SR-NASDAQ-2015-011 Amendment No 2 Page 8 of 64
securities 13 floating-rate mortgage-backed securities14 floating-rate loans 15 and
investment companies16 (including investment companies advised by the Adviser) that
13 Asset-backed securities are securities that are backed by a pool of assets The Fund currently intends to invest in asset-backed securities that are consumer asset-backed securities
14 Mortgage-backed securities which are securities that directly or indirectly represent a participation in or are secured by and payable from mortgage loans on real property will consist of (1) residential mortgage-backed securities (ldquoRMBSrdquo) (2) commercial mortgage-backed securities (ldquoCMBSrdquo) (3) stripped mortgage-backed securities (ldquoSMBSrdquo) which are mortgage-backed securities where mortgage payments are divided between paying the loanrsquos principal and paying the loanrsquos interest (4) collateralized mortgage obligations (ldquoCMOsrdquo) and real estate mortgage investment conduits (ldquoREMICsrdquo) which are mortgage-backed securities that are divided into multiple classes with each class being entitled to a different share of the principal and interest payments received from the pool of underlying assets
15 The floating-rate loans in which the Fund will invest will represent amounts borrowed by companies or other entities from banks and other lenders and a significant portion of such floating-rate loans may be rated below investment grade or unrated Floating-rate loans held by the Fund may be senior or subordinate obligations of the borrower and may or may not be secured by collateral First lien senior secured floating-rate loans are referred to herein as ldquosenior loansrdquo Floating-rate loans that are not senior loans (ie unsecured floating-rate loans and secured floating-rate loans that are not first lien floating-rate loans) are referred to herein as ldquojunior loansrdquo The Fund will generally invest in floating-rate loans that the Adviser deems to be liquid with readily available prices notwithstanding the foregoing the Fund may invest in floating-rate loans that are deemed illiquid so long as the Fund complies with the 15 limitation on investments of its net assets in illiquid assets described below under ldquoInvestment Restrictionsrdquo
16 The Fund currently anticipates investing only in registered open-end investment companies that are listed and traded in the US on registered exchanges (ie other ETFs) An ETF is an investment company registered under the 1940 Act that holds a portfolio of securities Many ETFs are designed to track the performance of a securities index including industry sector country and region indexes The Fund may invest in the securities of ETFs in excess of the limits imposed under the 1940 Act pursuant to exemptive orders obtained by other ETFs and their sponsors from the Commission In addition the Fund may invest in the securities of certain investment companies in excess of the limits imposed under the 1940 Act pursuant to an exemptive order obtained by the Trust and the Adviser from the Commission See Investment Company Act Release No 30377
SR-NASDAQ-2015-011 Amendment No 2 Page 9 of 64
invest primarily in the foregoing types of debt instruments17 (collectively ldquoFloating Rate
Debt Instrumentsrdquo)
At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade To be considered
ldquoinvestment graderdquo under normal market conditions rated Floating Rate Debt
Instruments will carry at the time of purchase a rating in the highest four rating
categories of at least one nationally recognized statistical ratings organization
(ldquoNRSROrdquo) (eg BBB- or higher by Standard amp Poorrsquos Ratings Services (ldquoSampPrdquo)
andor Fitch Ratings (ldquoFitchrdquo) or Baa3 or higher by Moodyrsquos Investors Service Inc
(ldquoMoodyrsquosrdquo)18 For unrated securities to be considered ldquoinvestment graderdquo under normal
market conditions such securities will be determined at the time of purchase to be of
comparable quality19 by the Adviser The Fund may invest up to 35 of its net assets in
(February 5 2013) (File No 812-13895) The ETFs in which the Fund may invest include Index Fund Shares (as described in Nasdaq Rule 5705) Portfolio Depository Receipts (as described in Nasdaq Rule 5705) and Managed Fund Shares (as described in Nasdaq Rule 5735) While the Fund may invest in inverse ETFs the Fund will not invest in leveraged or inverse leveraged (eg 2X or -3X) ETFs
17 The liquidity of a security especially in the case of asset-backed and mortgage-backed securities will be a substantial factor in the Fundrsquos security selection process Consistent with the discussion below under ldquoInvestment Restrictionsrdquo the Fund will not purchase any Floating Rate Debt Instruments (including asset-backed securities and mortgage-backed securities) that in the Adviserrsquos opinion are illiquid if as a result more than 15 of the value of the Fundrsquos net assets will be invested in illiquid assets
18 For the avoidance of doubt if a security is rated by multiple NRSROs and receives different ratings the Fund will treat the security as being rated in the highest rating category received from an NRSRO
19 Comparable quality of unrated securities will be determined by the Adviser based on fundamental credit analysis of the unrated security and comparable NRSRO-rated securities On a best efforts basis the Adviser will attempt to make a rating
SR-NASDAQ-2015-011 Amendment No 2 Page 10 of 64
securities that are at the time of investment rated below investment grade by each
NRSRO rating such securities (or securities that are unrated and determined by the
Adviser to be of comparable quality) commonly referred to as ldquohigh yieldrdquo or ldquojunkrdquo
bonds If subsequent to purchase by the Fund a security held by the Fund experiences a
decline in credit quality and falls below investment grade the Fund may continue to hold
the security and it will not cause the Fund to violate the 35 investment limitation
however the security will be taken into account for purposes of determining whether
purchases of additional securities will cause the Fund to violate such limitation
The Fund will limit its investments in asset-backed securities (excluding agency
mortgage-backed securities) and non-agency mortgage-backed securities (in the
aggregate) to 20 of its net assets20 In addition the Fund will limit its investments in
junior loans to 20 of its net assets
The Fund will hold debt securities (including in the aggregate Floating Rate
Debt Instruments and the fixed-rate debt securities described below) of at least 13
non-affiliated issuers
Other Investments
Under normal market conditions the Fund will invest primarily in the Floating
Rate Debt Instruments described above to meet its investment objective In addition the
determination based on publicly available data In making a ldquocomparable qualityrdquo determination the Adviser may consider for example whether the issuer of the security has issued other rated securities the nature and provisions of the relevant security whether the obligations under the relevant security are guaranteed by another entity and the rating of such guarantor (if any) relevant cash flows macroeconomic analysis andor sector or industry analysis
For the avoidance of doubt there is no limitation on the Fundrsquos investments in agency mortgage-backed securities
20
SR-NASDAQ-2015-011 Amendment No 2 Page 11 of 64
Fund may invest up to 20 of its net assets in the following types of fixed-rate debt
securities corporate21 and government bonds and notes agency securities22 instruments
of non-US issuers in developed markets privately-issued securities 23 asset-backed
securities 24 mortgage-backed securities 25 municipal bonds money market securities26
and investment companies27 (including investment companies advised by the Adviser)
that invest primarily in the foregoing types of debt securities
Further to pursue its investment objective the Fund may invest up to 20 of the
value of its net assets in exchange-listed options on US Treasury futures contracts and
exchange-listed US Treasury futures contracts28 The use of these derivative
transactions may allow the Fund to obtain net long or short exposures to selected interest
rates These derivatives may also be used to hedge risks including interest rate risks and
21 See footnote 10 above
22 See footnote 11 above
23 See footnote 12 above
24 See footnote 13 above
25 See footnote 14 above
26 ldquoMoney market securitiesrdquo for these purposes generally includes short-term high-quality obligations issued or guaranteed by the US Treasury or the agencies or instrumentalities of the US government short-term high-quality securities issued or guaranteed by non-US governments agencies and instrumentalities repurchase agreements commercial paper (both asset-backed and non-assetshybacked) and deposits and other obligations of US and non-US banks and financial institutions
27 See footnote 16 above
28 At least 90 of the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be invested in instruments that trade in markets that are members of the Intermarket Surveillance Group (ldquoISGrdquo) (see footnote 40 below) or are parties to a comprehensive surveillance sharing agreement with the Exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 12 of 64
credit risks associated with the Fundrsquos portfolio investments The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index
Investment Restrictions
The Fund will not invest 25 or more of the value of its total assets in securities
of issuers in any one industry This restriction does not apply to (a) obligations issued or
guaranteed by the US government its agencies or instrumentalities or (b) securities of
other investment companies29
The Fund may hold up to an aggregate amount of 15 of its net assets in illiquid
assets (calculated at the time of investment) including Rule 144A securities deemed
illiquid by the Adviser30 The Fund will monitor its portfolio liquidity on an ongoing
basis to determine whether in light of current circumstances an adequate level of
liquidity is being maintained and will consider taking appropriate steps in order to
maintain adequate liquidity if through a change in values net assets or other
circumstances more than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid
assets include securities subject to contractual or other restrictions on resale and other
29 See Form N-1A Item 9 The Commission has taken the position that a fund is concentrated if it invests more than 25 of the value of its total assets in any one industry See eg Investment Company Act Release No 9011 (October 30 1975) 40 FR 54241 (November 21 1975)
30 In reaching liquidity decisions the Adviser may consider the following factors the frequency of trades and quotes for the security the number of dealers wishing to purchase or sell the security and the number of other potential purchasers dealer undertakings to make a market in the security and the nature of the security and the nature of the marketplace in which it trades (eg the time needed to dispose of the security the method of soliciting offers and the mechanics of transfer)
SR-NASDAQ-2015-011 Amendment No 2 Page 13 of 64
instruments that lack readily available markets as determined in accordance with
Commission staff guidance31
The Fund will not invest in non-US equity securities
Creation and Redemption of Shares
The Fund will issue and redeem Shares on a continuous basis at net asset value
(ldquoNAVrdquo)32 only in large blocks of Shares (ldquoCreation Unitsrdquo) in transactions with
authorized participants generally including broker-dealers and large institutional
investors (ldquoAuthorized Participantsrdquo) Creation Units generally will consist of 50000
Shares although this may change from time to time Creation Units however are not
expected to consist of less than 50000 Shares As described in the Registration
Statement and consistent with the Exemptive Relief the Fund will issue and redeem
Creation Units in exchange for an in-kind portfolio of instruments andor cash in lieu of
31 The Commission has stated that long-standing Commission guidelines have required open-end funds to hold no more than 15 of their net assets in illiquid securities and other illiquid assets See Investment Company Act Release No 28193 (March 11 2008) 73 FR 14618 (March 18 2008) footnote 34 See also Investment Company Act Release No 5847 (October 21 1969) 35 FR 19989 (December 31 1970) (Statement Regarding ldquoRestricted Securitiesrdquo) Investment Company Act Release No 18612 (March 12 1992) 57 FR 9828 (March 20 1992) (Revisions of Guidelines to Form N-1A) A fundrsquos portfolio security is illiquid if it cannot be disposed of in the ordinary course of business within seven days at approximately the value ascribed to it by the fund See Investment Company Act Release No 14983 (March 12 1986) 51 FR 9773 (March 21 1986) (adopting amendments to Rule 2a-7 under the 1940 Act) Investment Company Act Release No 17452 (April 23 1990) 55 FR 17933 (April 30 1990) (adopting Rule 144A under the Securities Act of 1933)
32 The NAV of the Fundrsquos Shares generally will be calculated once daily Monday through Friday as of the close of regular trading on the New York Stock Exchange generally 400 pm Eastern Time (the ldquoNAV Calculation Timerdquo) NAV per Share will be calculated by dividing the Fundrsquos net assets by the number of Fund Shares outstanding For more information regarding the valuation of Fund investments in calculating the Fundrsquos NAV see the Registration Statement
SR-NASDAQ-2015-011 Amendment No 2 Page 14 of 64
such instruments (the ldquoCreation Basketrdquo) In addition if there is a difference between the
NAV attributable to a Creation Unit and the market value of the Creation Basket
exchanged for the Creation Unit the party conveying instruments with the lower value
will pay to the other an amount in cash equal to the difference (referred to as the ldquoCash
Componentrdquo)
Creations and redemptions must be made by or through an Authorized Participant
that has executed an agreement that has been agreed to by the Distributor and BNY with
respect to creations and redemptions of Creation Units All standard orders to create
Creation Units must be received by the transfer agent no later than the closing time of the
regular trading session on the New York Stock Exchange (ordinarily 400 pm Eastern
Time) (the ldquoClosing Timerdquo) in each case on the date such order is placed in order for the
creation of Creation Units to be effected based on the NAV of Shares as next determined
on such date after receipt of the order in proper form Shares may be redeemed only in
Creation Units at their NAV next determined after receipt not later than the Closing Time
of a redemption request in proper form by the Fund through the transfer agent and only
on a business day
The Fundrsquos custodian through the National Securities Clearing Corporation will
make available on each business day prior to the opening of business of the Exchange
the list of the names and quantities of the instruments comprising the Creation Basket as
well as the estimated Cash Component (if any) for that day The published Creation
Basket will apply until a new Creation Basket is announced on the following business
day prior to commencement of trading in the Shares
SR-NASDAQ-2015-011 Amendment No 2 Page 15 of 64
Net Asset Value
The Fundrsquos NAV will be determined as of the close of trading (normally
400 pm Eastern Time) on each day the New York Stock Exchange is open for
business NAV will be calculated for the Fund by taking the market price of the Fundrsquos
total assets including interest or dividends accrued but not yet collected less all
liabilities and dividing such amount by the total number of Shares outstanding The
result rounded to the nearest cent will be the NAV per Share All valuations will be
subject to review by the Board of Trustees of the Trust (ldquoTrust Boardrdquo) or its delegate
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with valuation procedures (which may be revised from time to time) adopted by the Trust
Board (the ldquoValuation Proceduresrdquo) and in accordance with the 1940 Act A market
valuation generally means a valuation (i) obtained from an exchange an independent
pricing service (ldquoPricing Servicerdquo) or a major market maker (or dealer) or (ii) based on a
price quotation or other equivalent indication of value supplied by an exchange a Pricing
Service or a major market maker (or dealer) The information summarized below is
based on the Valuation Procedures as currently in effect however as noted above the
Valuation Procedures are amended from time to time and therefore such information is
subject to change
Certain securities including Floating Rate Debt Instruments in which the Fund
may invest will not be listed on any securities exchange or board of trade Such
securities will typically be bought and sold by institutional investors in individually
negotiated private transactions that function in many respects like an over-the-counter
SR-NASDAQ-2015-011 Amendment No 2 Page 16 of 64
secondary market although typically no formal market makers will exist Certain
securities particularly debt securities will have few or no trades or trade infrequently
and information regarding a specific security may not be widely available or may be
incomplete Accordingly determinations of the fair value of debt securities may be
based on infrequent and dated information Because there is less reliable objective data
available elements of judgment may play a greater role in valuation of debt securities
than for other types of securities Typically Floating Rate Debt Instruments and other
debt securities in which the Fund may invest (other than those described below) will be
valued using information provided by a Pricing Service Debt securities having a
remaining maturity of 60 days or less when purchased will be valued at cost adjusted for
amortization of premiums and accretion of discounts provided the Adviserrsquos pricing
committee (the ldquoPricing Committeerdquo) has determined that the use of amortized cost is an
appropriate reflection of fair value given market and issuer-specific conditions existing at
the time of the determination Overnight repurchase agreements will be valued at cost
and term repurchase agreements (ie those whose maturity exceeds seven days) will be
valued at the average of the bid quotations obtained daily from at least two recognized
dealers
Asset-backed and mortgage-backed securities will generally be valued by using a
Pricing Service If a Pricing Service does not cover a particular asset-backed or
mortgage-backed security or discontinues covering a particular asset-backed or
mortgage-backed security the security will be priced using broker quotes generally
provided by brokers that make or participate in markets in the security To derive values
Pricing Services and broker-dealers may use matrix pricing and valuation models as well
SR-NASDAQ-2015-011 Amendment No 2 Page 17 of 64
as recent market transactions for the same or similar assets As it deems appropriate the
Pricing Committee may determine that a Pricing Service price does not represent an
accurate value of an asset-backed or mortgage-backed security based on broker quotes it
receives a recent trade in the security by the Fund information from a portfolio manager
or other market information In the event that the Pricing Committee determines that the
Pricing Service price is unreliable or inaccurate based on such other information broker
quotes may be used Additionally if the Pricing Committee determines that the price of
an asset-backed or mortgage-backed security obtained from a Pricing Service and
available broker quotes is unreliable or inaccurate due to market conditions or other
reasons or if a Pricing Service price or broker quote is unavailable the security will be
valued using fair value pricing as described below
Equity securities listed on any exchange other than the Exchange will be valued at
the last sale price on the exchange on which they are principally traded on the business
day as of which such value is being determined Equity securities listed on the Exchange
will be valued at the official closing price on the business day as of which such value is
being determined If there has been no sale on such day or no official closing price in
the case of securities traded on the Exchange the securities will be valued using fair
value pricing as described below Equity securities traded on more than one securities
exchange will be valued at the last sale price or official closing price as applicable on
the business day as of which such value is being determined at the close of the exchange
representing the principal market for such securities
Exchange-traded options and futures contracts will be valued at the closing price
in the market where such contracts are principally traded
SR-NASDAQ-2015-011 Amendment No 2 Page 18 of 64
Certain securities including Floating Rate Debt Instruments in which the Fund
will invest will not be able to be priced by pre-established pricing methods Such
securities may be valued by the Trust Board or its delegate at fair value The use of fair
value pricing by the Fund will be governed by the Valuation Procedures and conducted in
accordance with the provisions of the 1940 Act Valuing the Fundrsquos securities using fair
value pricing will result in using prices for those securities that may differ from current
market valuations or official closing prices on the applicable exchange
Availability of Information
The Fundrsquos website (wwwftportfolioscom) which will be publicly available
prior to the public offering of Shares will include a form of the prospectus for the Fund
that may be downloaded The website will include the Sharesrsquo ticker CUSIP and
exchange information along with additional quantitative information updated on a daily
basis including for the Fund (1) daily trading volume the prior business dayrsquos reported
NAV and closing price mid-point of the bidask spread at the time of calculation of such
NAV (the ldquoBidAsk Pricerdquo)33 and a calculation of the premium and discount of the
BidAsk Price against the NAV and (2) data in chart format displaying the frequency
distribution of discounts and premiums of the daily BidAsk Price against the NAV
within appropriate ranges for each of the four previous calendar quarters On each
business day before commencement of trading in Shares in the Regular Market Session34
33 The BidAsk Price of the Fund will be determined using the mid-point of the highest bid and the lowest offer on the Exchange as of the time of calculation of the Fundrsquos NAV The records relating to BidAsk Prices will be retained by the Fund and its service providers
34 See Nasdaq Rule 4120(b)(4) (describing the three trading sessions on the Exchange (1) Pre-Market Session from 4 am to 930 am Eastern Time (2)
SR-NASDAQ-2015-011 Amendment No 2 Page 19 of 64
on the Exchange the Fund will disclose on its website the identities and quantities of the
portfolio of securities and other assets (the ldquoDisclosed Portfoliordquo as defined in Nasdaq
Rule 5735(c)(2)) held by the Fund that will form the basis for the Fundrsquos calculation of
NAV at the end of the business day 35 The Fundrsquos disclosure of derivative positions in
the Disclosed Portfolio will include information that market participants can use to value
these positions intraday On a daily basis the Fund will disclose on the Fundrsquos website
the following information regarding each portfolio holding as applicable to the type of
holding ticker symbol CUSIP number or other identifier if any a description of the
holding (including the type of holding) the identity of the security or other asset or
instrument underlying the holding if any for options the option strike price quantity
held (as measured by for example par value notional value or number of shares
contracts or units) maturity date if any coupon rate if any effective date if any market
value of the holding and percentage weighting of the holding in the Fundrsquos portfolio
The website information will be publicly available at no charge
In addition for the Fund an estimated value defined in Rule 5735(c)(3) as the
ldquoIntraday Indicative Valuerdquo that reflects an estimated intraday value of the Fundrsquos
Disclosed Portfolio will be disseminated Moreover the Intraday Indicative Value
Regular Market Session from 930 am to 4 pm or 415 pm Eastern Time and (3) Post-Market Session from 4 pm or 415 pm to 8 pm Eastern Time)
Under accounting procedures to be followed by the Fund trades made on the prior business day (ldquoTrdquo) will be booked and reflected in NAV on the current business day (ldquoT+1rdquo) Accordingly the Fund will be able to disclose at the beginning of the business day the portfolio that will form the basis for the NAV calculation at the end of the business day
35
SR-NASDAQ-2015-011 Amendment No 2 Page 20 of 64
available on the NASDAQ OMX Information LLC proprietary index data service36 will
be based upon the current value for the components of the Disclosed Portfolio and will be
updated and widely disseminated by one or more major market data vendors and broadly
displayed at least every 15 seconds during the Regular Market Session The Intraday
Indicative Value will be based on quotes and closing prices from the securitiesrsquo local
market and may not reflect events that occur subsequent to the local marketrsquos close
Premiums and discounts between the Intraday Indicative Value and the market price may
occur This should not be viewed as a ldquoreal timerdquo update of the NAV per Share of the
Fund which is calculated only once a day
The dissemination of the Intraday Indicative Value together with the Disclosed
Portfolio will allow investors to determine the value of the underlying portfolio of the
Fund on a daily basis and will provide a close estimate of that value throughout the
trading day
Investors will also be able to obtain the Fundrsquos Statement of Additional
Information (ldquoSAIrdquo) the Fundrsquos annual and semi-annual reports (together ldquoShareholder
Reportsrdquo) and its Form N-CSR and Form N-SAR filed twice a year The Fundrsquos SAI
and Shareholder Reports will be available free upon request from the Fund and those
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or
downloaded from the Commissionrsquos website at wwwsecgov Information regarding
market price and trading volume of the Shares will be continually available on a real-time
Currently the NASDAQ OMX Global Index Data Service (ldquoGIDSrdquo) is the NASDAQ OMX global index data feed service offering real-time updates daily summary messages and access to widely followed indexes and Intraday Indicative Values for ETFs GIDS provides investment professionals with the daily information needed to track or trade NASDAQ OMX indexes listed ETFs or third-party partner indexes and ETFs
36
SR-NASDAQ-2015-011 Amendment No 2 Page 21 of 64
basis throughout the day on brokersrsquo computer screens and other electronic services
Information regarding the previous dayrsquos closing price and trading volume information
for the Shares will be published daily in the financial section of newspapers Quotation
and last sale information for the Shares will be available via Nasdaq proprietary quote
and trade services as well as in accordance with the Unlisted Trading Privileges and the
Consolidated Tape Association (ldquoCTArdquo) plans for the Shares Quotation and last sale
information for the other ETFs in which the Fund will invest will be available via the
quote and trade services of their respective primary exchanges as well as in accordance
with the Unlisted Trading Privileges and the CTA plans as applicable Quotation and
last sale information for US exchange-traded options will be available via the Options
Price Reporting Authority Intraday executable price quotations on Floating Rate Debt
Instruments and other assets not traded on an exchange will be available from major
broker-dealer firms or market data vendors as well as from automated quotation systems
published or other public sources or online information services Additionally the Trade
Reporting and Compliance Engine (ldquoTRACErdquo) of the Financial Industry Regulatory
Authority (ldquoFINRArdquo) will be a source of price information for corporate bonds
privately-issued securities mortgage-backed securities and asset-backed securities to the
extent transactions in such securities are reported to TRACE37 For exchange-traded
assets intraday pricing information will be available directly from the applicable listing
exchange
Broker-dealers that are FINRA member firms have an obligation to report transactions in specified debt securities to TRACE to the extent required under applicable FINRA rules Generally such debt securities will have at issuance a maturity that exceeds one calendar year
37
SR-NASDAQ-2015-011 Amendment No 2 Page 22 of 64
Additional information regarding the Fund and the Shares including investment
strategies risks creation and redemption procedures fees Fund holdings disclosure
policies distributions and taxes will be included in the Registration Statement
Initial and Continued Listing
The Shares will be subject to Rule 5735 which sets forth the initial and continued
listing criteria applicable to Managed Fund Shares The Exchange represents that for
initial andor continued listing the Fund must be in compliance with Rule 10A-338 under
the Act A minimum of 100000 Shares will be outstanding at the commencement of
trading on the Exchange The Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the NAV and the
Disclosed Portfolio will be made available to all market participants at the same time
Trading Halts
With respect to trading halts the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading in the Shares of the Fund Nasdaq will
halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12) Trading may be
halted because of market conditions or for reasons that in the view of the Exchange
make trading in the Shares inadvisable These may include (1) the extent to which
trading is not occurring in the securities andor the other assets constituting the Disclosed
Portfolio of the Fund or (2) whether other unusual conditions or circumstances
detrimental to the maintenance of a fair and orderly market are present Trading in the
See 17 CFR 24010A-3 38
SR-NASDAQ-2015-011 Amendment No 2 Page 23 of 64
Shares also will be subject to Rule 5735(d)(2)(D) which sets forth circumstances under
which Shares of the Fund may be halted
Trading Rules
Nasdaq deems the Shares to be equity securities thus rendering trading in the
Shares subject to Nasdaqrsquos existing rules governing the trading of equity securities
Nasdaq will allow trading in the Shares from 400 am until 800 pm Eastern Time
The Exchange has appropriate rules to facilitate transactions in the Shares during all
trading sessions As provided in Nasdaq Rule 5735(b)(3) the minimum price variation
for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $001
Surveillance
The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws39 The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities laws
The surveillances referred to above generally focus on detecting securities trading
outside their normal patterns which could be indicative of manipulative or other violative
activity When such situations are detected surveillance analysis follows and
investigations are opened where appropriate to review the behavior of all relevant
parties for all relevant trading violations
FINRA surveils trading on the Exchange pursuant to a regulatory services agreement The Exchange is responsible for FINRArsquos performance under this regulatory services agreement
39
SR-NASDAQ-2015-011 Amendment No 2 Page 24 of 64
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 25 of 64
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
b Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
SR-NASDAQ-2015-011 Amendment No 2 Page 26 of 64
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
SR-NASDAQ-2015-011 Amendment No 2 Page 27 of 64
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
SR-NASDAQ-2015-011 Amendment No 2 Page 28 of 64
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
SR-NASDAQ-2015-011 Amendment No 2 Page 29 of 64
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
SR-NASDAQ-2015-011 Amendment No 2 Page 30 of 64
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
SR-NASDAQ-2015-011 Amendment No 2 Page 31 of 64
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
4 Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
5 Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received from Members Participants or Others
Written comments were neither solicited nor received
6 Extension of Time Period for Commission Action
The Exchange does not consent at this time to an extension of any time period for
Commission action
7 Basis for Summary Effectiveness Pursuant to Section 19(b)(3) or for Accelerated Effectiveness Pursuant to Section 19(b)(2)
Not applicable
8 Proposed Rule Change Based on Rules of Another Self-Regulatory Organization or of the Commission
Not applicable
9 Security-Based Swap Submissions Filed Pursuant to Section 3C of the Act
Not applicable
SR-NASDAQ-2015-011 Amendment No 2 Page 32 of 64
10 Advance Notices Filed Pursuant to Section 806(e) of the Payment Clearing and Settlement Supervision Act
Not applicable
11 Exhibits
1 Completed notice of proposed rule change for publication in the Federal
Register
SR-NASDAQ-2015-011 Amendment No 2 Page 33 of 64
EXHIBIT 1
SECURITIES AND EXCHANGE COMMISSION (Release No 34shy File No SR-NASDAQ-2015-011)
April __ 2015
Self-Regulatory Organizations The NASDAQ Stock Market LLC Notice of Filing of Proposed Rule Change Relating to the Listing and Trading of the Shares of the First Trust Strategic Floating Rate ETF of First Trust Exchange-Traded Fund IV
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (ldquoActrdquo)1 and
Rule 19b-4 thereunder2 notice is hereby given that on February 12 2015 The NASDAQ
Stock Market LLC (ldquoNasdaqrdquo or the ldquoExchangerdquo) filed with the Securities and Exchange
Commission (ldquoCommissionrdquo) the proposed rule change as described in in Items I II and
III below which Items have been prepared by Nasdaq On April 6 2015 Nasdaq filed
Amendment No 1 which replaced the text of the original filing in its entirety On April
15 2015 Nasdaq filed Amendment No 2 which replaced the text of the original filing in
its entirety The Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons
I Self-Regulatory Organizationrsquos Statement of the Terms of Substance of the Proposed Rule Change
Nasdaq proposes to list and trade the shares of the First Trust Strategic Floating
Rate ETF (the ldquoFundrdquo) of the First Trust Strategic Floating Rate ETF (the ldquoFundrdquo) of
First Trust Exchange-Traded Fund IV (the ldquoTrustrdquo) under Nasdaq Rule 5735 (ldquoManaged
1 15 USC 78s(b)(1)
2 17 CFR 24019b-4
SR-NASDAQ-2015-011 Amendment No 2 Page 34 of 64
Fund Sharesrdquo)3 The shares of the Fund are collectively referred to herein as the
ldquoSharesrdquo
The text of the proposed rule change is available at
httpnasdaqcchwallstreetcom at Nasdaqrsquos principal office and at the Commissionrsquos
Public Reference Room
II Self-Regulatory Organizationrsquos Statement of the Purpose of and Statutory Basis for the Proposed Rule Change
In its filing with the Commission Nasdaq included statements concerning the
purpose of and basis for the proposed rule change The text of these statements may be
examined at the places specified in Item IV below Nasdaq has prepared summaries set
forth in Sections A B and C below of the most significant aspects of such statements
A Self-Regulatory Organizationrsquos Statement of the Purpose of and Statutory Basis for the Proposed Rule Change
1 Purpose
The Exchange proposes to list and trade the Shares of the Fund under Nasdaq
Rule 5735 which governs the listing and trading of Managed Fund Shares4 on the
3 The Commission approved Nasdaq Rule 5735 in Securities Exchange Act Release No 57962 (June 13 2008) 73 FR 35175 (June 20 2008) (SR-NASDAQ-2008shy039) There are already multiple actively-managed funds listed on the Exchange see eg Securities Exchange Act Release Nos 69464 (April 26 2013) 78 FR 25774 (May 2 2013) (SR-NASDAQ-2013-036) (order approving listing and trading of First Trust Senior Loan Fund) 68972 (February 22 2013) 78 FR 13721 (February 28 2013) (SR-NASDAQ-2012-147) (order approving listing and trading of First Trust High Yield LongShort ETF) 66489 (February 29 2012) 77 FR 13379 (March 6 2012) (SR-NASDAQ-2012-004) (order approving listing and trading of WisdomTree Emerging Markets Corporate Bond Fund) The Exchange believes the proposed rule change raises no significant issues not previously addressed in those prior Commission orders
4 A Managed Fund Share is a security that represents an interest in an investment company registered under the Investment Company Act of 1940 (15 USC 80ashy
SR-NASDAQ-2015-011 Amendment No 2 Page 35 of 64
Exchange The Fund will be an actively-managed exchange-traded fund (ldquoETFrdquo) The
Shares will be offered by the Trust which was established as a Massachusetts business
trust on September 15 20105 The Trust is registered with the Commission as an
investment company and has filed a registration statement on Form N-1A (ldquoRegistration
Statementrdquo) with the Commission6 The Fund will be a series of the Trust The Fund
intends to qualify each year as a regulated investment company (ldquoRICrdquo) under
Subchapter M of the Internal Revenue Code of 1986 as amended
First Trust Advisors LP will be the investment adviser (ldquoAdviserrdquo) to the Fund
First Trust Portfolios LP (the ldquoDistributorrdquo) will be the principal underwriter and
distributor of the Fundrsquos Shares The Bank of New York Mellon Corporation (ldquoBNYrdquo)
will act as the administrator accounting agent custodian and transfer agent to the Fund
1) (the ldquo1940 Actrdquo) organized as an open-end investment company or similar entity that invests in a portfolio of securities selected by its investment adviser consistent with its investment objectives and policies In contrast an open-end investment company that issues Index Fund Shares listed and traded on the Exchange under Nasdaq Rule 5705 seeks to provide investment results that correspond generally to the price and yield performance of a specific foreign or domestic stock index fixed income securities index or combination thereof
5 The Commission has issued an order upon which the Trust may rely granting certain exemptive relief under the 1940 Act See Investment Company Act Release No 30029 (April 10 2012) (File No 812-13795) (the ldquoExemptive Reliefrdquo) In addition the Commission has issued no-action relief upon which the Trust may rely pertaining to the Fundrsquos ability to invest in derivatives notwithstanding certain representations in the application for the Exemptive Relief See Commission No-Action Letter (December 6 2012)
6 See Post-Effective Amendment No 104 to Registration Statement on Form N-1A for the Trust dated January 29 2015 (File Nos 333-174332 and 811-22559) The descriptions of the Fund and the Shares contained herein are based in part on information in the Registration Statement
7
SR-NASDAQ-2015-011 Amendment No 2 Page 36 of 64
Paragraph (g) of Rule 5735 provides that if the investment adviser to the
investment company issuing Managed Fund Shares is affiliated with a broker-dealer
such investment adviser shall erect a ldquofire wallrdquo between the investment adviser and the
broker-dealer with respect to access to information concerning the composition andor
changes to such investment company portfolio7 In addition paragraph (g) further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio Rule 5735(g) is similar
to Nasdaq Rule 5705(b)(5)(A)(i) however paragraph (g) in connection with the
establishment of a ldquofire wallrdquo between the investment adviser and the broker-dealer
reflects the applicable open-end fundrsquos portfolio not an underlying benchmark index as
is the case with index-based funds The Adviser is not a broker-dealer although it is
affiliated with the Distributor a broker-dealer The Adviser has implemented a fire wall
An investment adviser to an open-end fund is required to be registered under the Investment Advisers Act of 1940 (the ldquoAdvisers Actrdquo) As a result the Adviser and its related personnel are subject to the provisions of Rule 204A-1 under the Advisers Act relating to codes of ethics This Rule requires investment advisers to adopt a code of ethics that reflects the fiduciary nature of the relationship to clients as well as compliance with other applicable securities laws Accordingly procedures designed to prevent the communication and misuse of non-public information by an investment adviser must be consistent with Rule 204A-1 under the Advisers Act In addition Rule 206(4)-7 under the Advisers Act makes it unlawful for an investment adviser to provide investment advice to clients unless such investment adviser has (i) adopted and implemented written policies and procedures reasonably designed to prevent violation by the investment adviser and its supervised persons of the Advisers Act and the Commission rules adopted thereunder (ii) implemented at a minimum an annual review regarding the adequacy of the policies and procedures established pursuant to subparagraph (i) above and the effectiveness of their implementation and (iii) designated an individual (who is a supervised person) responsible for administering the policies and procedures adopted under subparagraph (i) above
8
SR-NASDAQ-2015-011 Amendment No 2 Page 37 of 64
with respect to its broker-dealer affiliate regarding access to information concerning the
composition andor changes to the portfolio In addition personnel who make decisions
on the Fundrsquos portfolio composition will be subject to procedures designed to prevent the
use and dissemination of material non-public information regarding the Fundrsquos portfolio
In the event (a) the Adviser becomes or becomes newly affiliated with a broker-dealer
or (b) any new adviser or sub-adviser is a registered broker-dealer or becomes affiliated
with another broker-dealer it will implement a fire wall with respect to its relevant
personnel andor such broker-dealer affiliate as applicable regarding access to
information concerning the composition andor changes to the portfolio and will be
subject to procedures designed to prevent the use and dissemination of material
non-public information regarding such portfolio The Fund does not currently intend to
use a sub-adviser
First Trust Strategic Floating Rate ETF
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions8 at least 80 of its
The term ldquounder normal market conditionsrdquo as used herein includes but is not limited to the absence of adverse market economic political or other conditions including extreme volatility or trading halts in the fixed income markets or the financial markets generally operational issues causing dissemination of inaccurate market information or force majeure type events such as systems failure natural or man-made disaster act of God armed conflict act of terrorism riot or labor disruption or any similar intervening circumstance For temporary defensive purposes during the initial invest-up period and during periods of high cash inflows or outflows the Fund may depart from its principal investment strategies for example it may hold a higher than normal proportion of its assets in cash During such periods the Fund may not be able to achieve its investment objective The Fund may adopt a defensive strategy when the Adviser believes securities in which the Fund normally invests have elevated risks due to political or economic factors and in other extraordinary circumstances
SR-NASDAQ-2015-011 Amendment No 2 Page 38 of 64
net assets in a portfolio of the following types of floating-rate9 debt instruments issued by
US and non-US public- and private-sector entities floating-rate corporate10 and
government bonds and notes floating-rate agency securities 11 floating-rate instruments
of non-US issuers floating-rate privately-issued securities 12 floating-rate asset-backed
securities 13 floating-rate mortgage-backed securities14 floating-rate loans 15 and
9 For the avoidance of doubt the term ldquofloating-raterdquo shall also include similar terms such as ldquovariable-raterdquo and ldquoadjustable-raterdquo
10 The Adviser expects that under normal market conditions generally for a corporate bond to be considered as an eligible investment after taking into account such an investment at least 75 of the Fundrsquos net assets that are invested in floating-rate corporate bonds and as described below fixed-rate corporate bonds (in the aggregate) will be comprised of corporate bonds that have at the time of original issuance $100 million or more par amount outstanding
11 ldquoAgency securitiesrdquo for these purposes generally includes securities issued by the following entities Government National Mortgage Association (Ginnie Mae) Federal National Mortgage Association (Fannie Mae) Federal Home Loan Banks (FHLBanks) Federal Home Loan Mortgage Corporation (Freddie Mac) Farm Credit System (FCS) Farm Credit Banks (FCBanks) Student Loan Marketing Association (Sallie Mae) Resolution Funding Corporation (REFCORP) Financing Corporation (FICO) and the Farm Credit System (FCS) Financial Assistance Corporation (FAC) Agency securities can include but are not limited to mortgage-backed securities
12 ldquoPrivately-issued securitiesrdquo for these purposes generally includes Rule 144A securities other than mortgage-backed Rule 144A securities Under normal market conditions privately-issued securities will have at the time of original issuance $100 million or more principal amount outstanding to be considered eligible investments
13 Asset-backed securities are securities that are backed by a pool of assets The Fund currently intends to invest in asset-backed securities that are consumer asset-backed securities
14 Mortgage-backed securities which are securities that directly or indirectly represent a participation in or are secured by and payable from mortgage loans on real property will consist of (1) residential mortgage-backed securities (ldquoRMBSrdquo) (2) commercial mortgage-backed securities (ldquoCMBSrdquo) (3) stripped mortgage-backed securities (ldquoSMBSrdquo) which are mortgage-backed securities
SR-NASDAQ-2015-011 Amendment No 2 Page 39 of 64
investment companies16 (including investment companies advised by the Adviser) that
invest primarily in the foregoing types of debt instruments17 (collectively ldquoFloating Rate
Debt Instrumentsrdquo)
where mortgage payments are divided between paying the loanrsquos principal and paying the loanrsquos interest (4) collateralized mortgage obligations (ldquoCMOsrdquo) and real estate mortgage investment conduits (ldquoREMICsrdquo) which are mortgage-backed securities that are divided into multiple classes with each class being entitled to a different share of the principal and interest payments received from the pool of underlying assets
15 The floating-rate loans in which the Fund will invest will represent amounts borrowed by companies or other entities from banks and other lenders and a significant portion of such floating-rate loans may be rated below investment grade or unrated Floating-rate loans held by the Fund may be senior or subordinate obligations of the borrower and may or may not be secured by collateral First lien senior secured floating-rate loans are referred to herein as ldquosenior loansrdquo Floating-rate loans that are not senior loans (ie unsecured floating-rate loans and secured floating-rate loans that are not first lien floating-rate loans) are referred to herein as ldquojunior loansrdquo The Fund will generally invest in floating-rate loans that the Adviser deems to be liquid with readily available prices notwithstanding the foregoing the Fund may invest in floating-rate loans that are deemed illiquid so long as the Fund complies with the 15 limitation on investments of its net assets in illiquid assets described below under ldquoInvestment Restrictionsrdquo
16 The Fund currently anticipates investing only in registered open-end investment companies that are listed and traded in the US on registered exchanges (ie other ETFs) An ETF is an investment company registered under the 1940 Act that holds a portfolio of securities Many ETFs are designed to track the performance of a securities index including industry sector country and region indexes The Fund may invest in the securities of ETFs in excess of the limits imposed under the 1940 Act pursuant to exemptive orders obtained by other ETFs and their sponsors from the Commission In addition the Fund may invest in the securities of certain investment companies in excess of the limits imposed under the 1940 Act pursuant to an exemptive order obtained by the Trust and the Adviser from the Commission See Investment Company Act Release No 30377 (February 5 2013) (File No 812-13895) The ETFs in which the Fund may invest include Index Fund Shares (as described in Nasdaq Rule 5705) Portfolio Depository Receipts (as described in Nasdaq Rule 5705) and Managed Fund Shares (as described in Nasdaq Rule 5735) While the Fund may invest in inverse ETFs the Fund will not invest in leveraged or inverse leveraged (eg 2X or -3X) ETFs
SR-NASDAQ-2015-011 Amendment No 2 Page 40 of 64
At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade To be considered
ldquoinvestment graderdquo under normal market conditions rated Floating Rate Debt
Instruments will carry at the time of purchase a rating in the highest four rating
categories of at least one nationally recognized statistical ratings organization
(ldquoNRSROrdquo) (eg BBB- or higher by Standard amp Poorrsquos Ratings Services (ldquoSampPrdquo)
andor Fitch Ratings (ldquoFitchrdquo) or Baa3 or higher by Moodyrsquos Investors Service Inc
(ldquoMoodyrsquosrdquo)18 For unrated securities to be considered ldquoinvestment graderdquo under normal
market conditions such securities will be determined at the time of purchase to be of
comparable quality19 by the Adviser The Fund may invest up to 35 of its net assets in
securities that are at the time of investment rated below investment grade by each
NRSRO rating such securities (or securities that are unrated and determined by the
17 The liquidity of a security especially in the case of asset-backed and mortgage-backed securities will be a substantial factor in the Fundrsquos security selection process Consistent with the discussion below under ldquoInvestment Restrictionsrdquo the Fund will not purchase any Floating Rate Debt Instruments (including asset-backed securities and mortgage-backed securities) that in the Adviserrsquos opinion are illiquid if as a result more than 15 of the value of the Fundrsquos net assets will be invested in illiquid assets
18 For the avoidance of doubt if a security is rated by multiple NRSROs and receives different ratings the Fund will treat the security as being rated in the highest rating category received from an NRSRO
19 Comparable quality of unrated securities will be determined by the Adviser based on fundamental credit analysis of the unrated security and comparable NRSRO-rated securities On a best efforts basis the Adviser will attempt to make a rating determination based on publicly available data In making a ldquocomparable qualityrdquo determination the Adviser may consider for example whether the issuer of the security has issued other rated securities the nature and provisions of the relevant security whether the obligations under the relevant security are guaranteed by another entity and the rating of such guarantor (if any) relevant cash flows macroeconomic analysis andor sector or industry analysis
SR-NASDAQ-2015-011 Amendment No 2 Page 41 of 64
Adviser to be of comparable quality) commonly referred to as ldquohigh yieldrdquo or ldquojunkrdquo
bonds If subsequent to purchase by the Fund a security held by the Fund experiences a
decline in credit quality and falls below investment grade the Fund may continue to hold
the security and it will not cause the Fund to violate the 35 investment limitation
however the security will be taken into account for purposes of determining whether
purchases of additional securities will cause the Fund to violate such limitation
The Fund will limit its investments in asset-backed securities (excluding agency
mortgage-backed securities) and non-agency mortgage-backed securities (in the
aggregate) to 20 of its net assets20 In addition the Fund will limit its investments in
junior loans to 20 of its net assets
The Fund will hold debt securities (including in the aggregate Floating Rate
Debt Instruments and the fixed-rate debt securities described below) of at least 13
non-affiliated issuers
Other Investments
Under normal market conditions the Fund will invest primarily in the Floating
Rate Debt Instruments described above to meet its investment objective In addition the
Fund may invest up to 20 of its net assets in the following types of fixed-rate debt
securities corporate21 and government bonds and notes agency securities22 instruments
20 For the avoidance of doubt there is no limitation on the Fundrsquos investments in agency mortgage-backed securities
21 See footnote 10 above
22 See footnote 11 above
SR-NASDAQ-2015-011 Amendment No 2 Page 42 of 64
of non-US issuers in developed markets privately-issued securities 23 asset-backed
securities 24 mortgage-backed securities 25 municipal bonds money market securities26
and investment companies27 (including investment companies advised by the Adviser)
that invest primarily in the foregoing types of debt securities
Further to pursue its investment objective the Fund may invest up to 20 of the
value of its net assets in exchange-listed options on US Treasury futures contracts and
exchange-listed US Treasury futures contracts28 The use of these derivative
transactions may allow the Fund to obtain net long or short exposures to selected interest
rates These derivatives may also be used to hedge risks including interest rate risks and
credit risks associated with the Fundrsquos portfolio investments The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
23 See footnote 12 above
24 See footnote 13 above
25 See footnote 14 above
26 ldquoMoney market securitiesrdquo for these purposes generally includes short-term high-quality obligations issued or guaranteed by the US Treasury or the agencies or instrumentalities of the US government short-term high-quality securities issued or guaranteed by non-US governments agencies and instrumentalities repurchase agreements commercial paper (both asset-backed and non-assetshybacked) and deposits and other obligations of US and non-US banks and financial institutions
27 See footnote 16 above
28 At least 90 of the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be invested in instruments that trade in markets that are members of the Intermarket Surveillance Group (ldquoISGrdquo) (see footnote 40 below) or are parties to a comprehensive surveillance sharing agreement with the Exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 43 of 64
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index
Investment Restrictions
The Fund will not invest 25 or more of the value of its total assets in securities
of issuers in any one industry This restriction does not apply to (a) obligations issued or
guaranteed by the US government its agencies or instrumentalities or (b) securities of
other investment companies29
The Fund may hold up to an aggregate amount of 15 of its net assets in illiquid
assets (calculated at the time of investment) including Rule 144A securities deemed
illiquid by the Adviser30 The Fund will monitor its portfolio liquidity on an ongoing
basis to determine whether in light of current circumstances an adequate level of
liquidity is being maintained and will consider taking appropriate steps in order to
maintain adequate liquidity if through a change in values net assets or other
circumstances more than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid
assets include securities subject to contractual or other restrictions on resale and other
29 See Form N-1A Item 9 The Commission has taken the position that a fund is concentrated if it invests more than 25 of the value of its total assets in any one industry See eg Investment Company Act Release No 9011 (October 30 1975) 40 FR 54241 (November 21 1975)
30 In reaching liquidity decisions the Adviser may consider the following factors the frequency of trades and quotes for the security the number of dealers wishing to purchase or sell the security and the number of other potential purchasers dealer undertakings to make a market in the security and the nature of the security and the nature of the marketplace in which it trades (eg the time needed to dispose of the security the method of soliciting offers and the mechanics of transfer)
SR-NASDAQ-2015-011 Amendment No 2 Page 44 of 64
instruments that lack readily available markets as determined in accordance with
Commission staff guidance31
The Fund will not invest in non-US equity securities
Creation and Redemption of Shares
The Fund will issue and redeem Shares on a continuous basis at net asset value
(ldquoNAVrdquo)32 only in large blocks of Shares (ldquoCreation Unitsrdquo) in transactions with
authorized participants generally including broker-dealers and large institutional
investors (ldquoAuthorized Participantsrdquo) Creation Units generally will consist of 50000
Shares although this may change from time to time Creation Units however are not
expected to consist of less than 50000 Shares As described in the Registration
Statement and consistent with the Exemptive Relief the Fund will issue and redeem
Creation Units in exchange for an in-kind portfolio of instruments andor cash in lieu of
31 The Commission has stated that long-standing Commission guidelines have required open-end funds to hold no more than 15 of their net assets in illiquid securities and other illiquid assets See Investment Company Act Release No 28193 (March 11 2008) 73 FR 14618 (March 18 2008) footnote 34 See also Investment Company Act Release No 5847 (October 21 1969) 35 FR 19989 (December 31 1970) (Statement Regarding ldquoRestricted Securitiesrdquo) Investment Company Act Release No 18612 (March 12 1992) 57 FR 9828 (March 20 1992) (Revisions of Guidelines to Form N-1A) A fundrsquos portfolio security is illiquid if it cannot be disposed of in the ordinary course of business within seven days at approximately the value ascribed to it by the fund See Investment Company Act Release No 14983 (March 12 1986) 51 FR 9773 (March 21 1986) (adopting amendments to Rule 2a-7 under the 1940 Act) Investment Company Act Release No 17452 (April 23 1990) 55 FR 17933 (April 30 1990) (adopting Rule 144A under the Securities Act of 1933)
32 The NAV of the Fundrsquos Shares generally will be calculated once daily Monday through Friday as of the close of regular trading on the New York Stock Exchange generally 400 pm Eastern Time (the ldquoNAV Calculation Timerdquo) NAV per Share will be calculated by dividing the Fundrsquos net assets by the number of Fund Shares outstanding For more information regarding the valuation of Fund investments in calculating the Fundrsquos NAV see the Registration Statement
SR-NASDAQ-2015-011 Amendment No 2 Page 45 of 64
such instruments (the ldquoCreation Basketrdquo) In addition if there is a difference between the
NAV attributable to a Creation Unit and the market value of the Creation Basket
exchanged for the Creation Unit the party conveying instruments with the lower value
will pay to the other an amount in cash equal to the difference (referred to as the ldquoCash
Componentrdquo)
Creations and redemptions must be made by or through an Authorized Participant
that has executed an agreement that has been agreed to by the Distributor and BNY with
respect to creations and redemptions of Creation Units All standard orders to create
Creation Units must be received by the transfer agent no later than the closing time of the
regular trading session on the New York Stock Exchange (ordinarily 400 pm Eastern
Time) (the ldquoClosing Timerdquo) in each case on the date such order is placed in order for the
creation of Creation Units to be effected based on the NAV of Shares as next determined
on such date after receipt of the order in proper form Shares may be redeemed only in
Creation Units at their NAV next determined after receipt not later than the Closing Time
of a redemption request in proper form by the Fund through the transfer agent and only
on a business day
The Fundrsquos custodian through the National Securities Clearing Corporation will
make available on each business day prior to the opening of business of the Exchange
the list of the names and quantities of the instruments comprising the Creation Basket as
well as the estimated Cash Component (if any) for that day The published Creation
Basket will apply until a new Creation Basket is announced on the following business
day prior to commencement of trading in the Shares
SR-NASDAQ-2015-011 Amendment No 2 Page 46 of 64
Net Asset Value
The Fundrsquos NAV will be determined as of the close of trading (normally
400 pm Eastern Time) on each day the New York Stock Exchange is open for
business NAV will be calculated for the Fund by taking the market price of the Fundrsquos
total assets including interest or dividends accrued but not yet collected less all
liabilities and dividing such amount by the total number of Shares outstanding The
result rounded to the nearest cent will be the NAV per Share All valuations will be
subject to review by the Board of Trustees of the Trust (ldquoTrust Boardrdquo) or its delegate
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with valuation procedures (which may be revised from time to time) adopted by the Trust
Board (the ldquoValuation Proceduresrdquo) and in accordance with the 1940 Act A market
valuation generally means a valuation (i) obtained from an exchange an independent
pricing service (ldquoPricing Servicerdquo) or a major market maker (or dealer) or (ii) based on a
price quotation or other equivalent indication of value supplied by an exchange a Pricing
Service or a major market maker (or dealer) The information summarized below is
based on the Valuation Procedures as currently in effect however as noted above the
Valuation Procedures are amended from time to time and therefore such information is
subject to change
Certain securities including Floating Rate Debt Instruments in which the Fund
may invest will not be listed on any securities exchange or board of trade Such
securities will typically be bought and sold by institutional investors in individually
negotiated private transactions that function in many respects like an over-the-counter
SR-NASDAQ-2015-011 Amendment No 2 Page 47 of 64
secondary market although typically no formal market makers will exist Certain
securities particularly debt securities will have few or no trades or trade infrequently
and information regarding a specific security may not be widely available or may be
incomplete Accordingly determinations of the fair value of debt securities may be
based on infrequent and dated information Because there is less reliable objective data
available elements of judgment may play a greater role in valuation of debt securities
than for other types of securities Typically Floating Rate Debt Instruments and other
debt securities in which the Fund may invest (other than those described below) will be
valued using information provided by a Pricing Service Debt securities having a
remaining maturity of 60 days or less when purchased will be valued at cost adjusted for
amortization of premiums and accretion of discounts provided the Adviserrsquos pricing
committee (the ldquoPricing Committeerdquo) has determined that the use of amortized cost is an
appropriate reflection of fair value given market and issuer-specific conditions existing at
the time of the determination Overnight repurchase agreements will be valued at cost
and term repurchase agreements (ie those whose maturity exceeds seven days) will be
valued at the average of the bid quotations obtained daily from at least two recognized
dealers
Asset-backed and mortgage-backed securities will generally be valued by using a
Pricing Service If a Pricing Service does not cover a particular asset-backed or
mortgage-backed security or discontinues covering a particular asset-backed or
mortgage-backed security the security will be priced using broker quotes generally
provided by brokers that make or participate in markets in the security To derive values
Pricing Services and broker-dealers may use matrix pricing and valuation models as well
SR-NASDAQ-2015-011 Amendment No 2 Page 48 of 64
as recent market transactions for the same or similar assets As it deems appropriate the
Pricing Committee may determine that a Pricing Service price does not represent an
accurate value of an asset-backed or mortgage-backed security based on broker quotes it
receives a recent trade in the security by the Fund information from a portfolio manager
or other market information In the event that the Pricing Committee determines that the
Pricing Service price is unreliable or inaccurate based on such other information broker
quotes may be used Additionally if the Pricing Committee determines that the price of
an asset-backed or mortgage-backed security obtained from a Pricing Service and
available broker quotes is unreliable or inaccurate due to market conditions or other
reasons or if a Pricing Service price or broker quote is unavailable the security will be
valued using fair value pricing as described below
Equity securities listed on any exchange other than the Exchange will be valued at
the last sale price on the exchange on which they are principally traded on the business
day as of which such value is being determined Equity securities listed on the Exchange
will be valued at the official closing price on the business day as of which such value is
being determined If there has been no sale on such day or no official closing price in
the case of securities traded on the Exchange the securities will be valued using fair
value pricing as described below Equity securities traded on more than one securities
exchange will be valued at the last sale price or official closing price as applicable on
the business day as of which such value is being determined at the close of the exchange
representing the principal market for such securities
Exchange-traded options and futures contracts will be valued at the closing price
in the market where such contracts are principally traded
SR-NASDAQ-2015-011 Amendment No 2 Page 49 of 64
Certain securities including Floating Rate Debt Instruments in which the Fund
will invest will not be able to be priced by pre-established pricing methods Such
securities may be valued by the Trust Board or its delegate at fair value The use of fair
value pricing by the Fund will be governed by the Valuation Procedures and conducted in
accordance with the provisions of the 1940 Act Valuing the Fundrsquos securities using fair
value pricing will result in using prices for those securities that may differ from current
market valuations or official closing prices on the applicable exchange
Availability of Information
The Fundrsquos website (wwwftportfolioscom) which will be publicly available
prior to the public offering of Shares will include a form of the prospectus for the Fund
that may be downloaded The website will include the Sharesrsquo ticker CUSIP and
exchange information along with additional quantitative information updated on a daily
basis including for the Fund (1) daily trading volume the prior business dayrsquos reported
NAV and closing price mid-point of the bidask spread at the time of calculation of such
NAV (the ldquoBidAsk Pricerdquo)33 and a calculation of the premium and discount of the
BidAsk Price against the NAV and (2) data in chart format displaying the frequency
distribution of discounts and premiums of the daily BidAsk Price against the NAV
within appropriate ranges for each of the four previous calendar quarters On each
business day before commencement of trading in Shares in the Regular Market Session34
33 The BidAsk Price of the Fund will be determined using the mid-point of the highest bid and the lowest offer on the Exchange as of the time of calculation of the Fundrsquos NAV The records relating to BidAsk Prices will be retained by the Fund and its service providers
34 See Nasdaq Rule 4120(b)(4) (describing the three trading sessions on the Exchange (1) Pre-Market Session from 4 am to 930 am Eastern Time (2)
SR-NASDAQ-2015-011 Amendment No 2 Page 50 of 64
on the Exchange the Fund will disclose on its website the identities and quantities of the
portfolio of securities and other assets (the ldquoDisclosed Portfoliordquo as defined in Nasdaq
Rule 5735(c)(2)) held by the Fund that will form the basis for the Fundrsquos calculation of
NAV at the end of the business day 35 The Fundrsquos disclosure of derivative positions in
the Disclosed Portfolio will include information that market participants can use to value
these positions intraday On a daily basis the Fund will disclose on the Fundrsquos website
the following information regarding each portfolio holding as applicable to the type of
holding ticker symbol CUSIP number or other identifier if any a description of the
holding (including the type of holding) the identity of the security or other asset or
instrument underlying the holding if any for options the option strike price quantity
held (as measured by for example par value notional value or number of shares
contracts or units) maturity date if any coupon rate if any effective date if any market
value of the holding and percentage weighting of the holding in the Fundrsquos portfolio
The website information will be publicly available at no charge
In addition for the Fund an estimated value defined in Rule 5735(c)(3) as the
ldquoIntraday Indicative Valuerdquo that reflects an estimated intraday value of the Fundrsquos
Disclosed Portfolio will be disseminated Moreover the Intraday Indicative Value
Regular Market Session from 930 am to 4 pm or 415 pm Eastern Time and (3) Post-Market Session from 4 pm or 415 pm to 8 pm Eastern Time)
Under accounting procedures to be followed by the Fund trades made on the prior business day (ldquoTrdquo) will be booked and reflected in NAV on the current business day (ldquoT+1rdquo) Accordingly the Fund will be able to disclose at the beginning of the business day the portfolio that will form the basis for the NAV calculation at the end of the business day
35
SR-NASDAQ-2015-011 Amendment No 2 Page 51 of 64
available on the NASDAQ OMX Information LLC proprietary index data service36 will
be based upon the current value for the components of the Disclosed Portfolio and will be
updated and widely disseminated by one or more major market data vendors and broadly
displayed at least every 15 seconds during the Regular Market Session The Intraday
Indicative Value will be based on quotes and closing prices from the securitiesrsquo local
market and may not reflect events that occur subsequent to the local marketrsquos close
Premiums and discounts between the Intraday Indicative Value and the market price may
occur This should not be viewed as a ldquoreal timerdquo update of the NAV per Share of the
Fund which is calculated only once a day
The dissemination of the Intraday Indicative Value together with the Disclosed
Portfolio will allow investors to determine the value of the underlying portfolio of the
Fund on a daily basis and will provide a close estimate of that value throughout the
trading day
Investors will also be able to obtain the Fundrsquos Statement of Additional
Information (ldquoSAIrdquo) the Fundrsquos annual and semi-annual reports (together ldquoShareholder
Reportsrdquo) and its Form N-CSR and Form N-SAR filed twice a year The Fundrsquos SAI
and Shareholder Reports will be available free upon request from the Fund and those
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or
downloaded from the Commissionrsquos website at wwwsecgov Information regarding
Currently the NASDAQ OMX Global Index Data Service (ldquoGIDSrdquo) is the NASDAQ OMX global index data feed service offering real-time updates daily summary messages and access to widely followed indexes and Intraday Indicative Values for ETFs GIDS provides investment professionals with the daily information needed to track or trade NASDAQ OMX indexes listed ETFs or third-party partner indexes and ETFs
36
SR-NASDAQ-2015-011 Amendment No 2 Page 52 of 64
market price and trading volume of the Shares will be continually available on a real-time
basis throughout the day on brokersrsquo computer screens and other electronic services
Information regarding the previous dayrsquos closing price and trading volume information
for the Shares will be published daily in the financial section of newspapers Quotation
and last sale information for the Shares will be available via Nasdaq proprietary quote
and trade services as well as in accordance with the Unlisted Trading Privileges and the
Consolidated Tape Association (ldquoCTArdquo) plans for the Shares Quotation and last sale
information for the other ETFs in which the Fund will invest will be available via the
quote and trade services of their respective primary exchanges as well as in accordance
with the Unlisted Trading Privileges and the CTA plans as applicable Quotation and
last sale information for US exchange-traded options will be available via the Options
Price Reporting Authority Intraday executable price quotations on Floating Rate Debt
Instruments and other assets not traded on an exchange will be available from major
broker-dealer firms or market data vendors as well as from automated quotation systems
published or other public sources or online information services Additionally the Trade
Reporting and Compliance Engine (ldquoTRACErdquo) of the Financial Industry Regulatory
Authority (ldquoFINRArdquo) will be a source of price information for corporate bonds
privately-issued securities mortgage-backed securities and asset-backed securities to the
extent transactions in such securities are reported to TRACE37 For exchange-traded
Broker-dealers that are FINRA member firms have an obligation to report transactions in specified debt securities to TRACE to the extent required under applicable FINRA rules Generally such debt securities will have at issuance a maturity that exceeds one calendar year
37
SR-NASDAQ-2015-011 Amendment No 2 Page 53 of 64
assets intraday pricing information will be available directly from the applicable listing
exchange
Additional information regarding the Fund and the Shares including investment
strategies risks creation and redemption procedures fees Fund holdings disclosure
policies distributions and taxes will be included in the Registration Statement
Initial and Continued Listing
The Shares will be subject to Rule 5735 which sets forth the initial and continued
listing criteria applicable to Managed Fund Shares The Exchange represents that for
initial andor continued listing the Fund must be in compliance with Rule 10A-338 under
the Act A minimum of 100000 Shares will be outstanding at the commencement of
trading on the Exchange The Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the NAV and the
Disclosed Portfolio will be made available to all market participants at the same time
Trading Halts
With respect to trading halts the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading in the Shares of the Fund Nasdaq will
halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12) Trading may be
halted because of market conditions or for reasons that in the view of the Exchange
make trading in the Shares inadvisable These may include (1) the extent to which
trading is not occurring in the securities andor the other assets constituting the Disclosed
Portfolio of the Fund or (2) whether other unusual conditions or circumstances
See 17 CFR 24010A-3 38
SR-NASDAQ-2015-011 Amendment No 2 Page 54 of 64
detrimental to the maintenance of a fair and orderly market are present Trading in the
Shares also will be subject to Rule 5735(d)(2)(D) which sets forth circumstances under
which Shares of the Fund may be halted
Trading Rules
Nasdaq deems the Shares to be equity securities thus rendering trading in the
Shares subject to Nasdaqrsquos existing rules governing the trading of equity securities
Nasdaq will allow trading in the Shares from 400 am until 800 pm Eastern Time
The Exchange has appropriate rules to facilitate transactions in the Shares during all
trading sessions As provided in Nasdaq Rule 5735(b)(3) the minimum price variation
for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $001
Surveillance
The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws39 The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities laws
The surveillances referred to above generally focus on detecting securities trading
outside their normal patterns which could be indicative of manipulative or other violative
activity When such situations are detected surveillance analysis follows and
FINRA surveils trading on the Exchange pursuant to a regulatory services agreement The Exchange is responsible for FINRArsquos performance under this regulatory services agreement
39
SR-NASDAQ-2015-011 Amendment No 2 Page 55 of 64
investigations are opened where appropriate to review the behavior of all relevant
parties for all relevant trading violations
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 56 of 64
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
SR-NASDAQ-2015-011 Amendment No 2 Page 57 of 64
2 Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
SR-NASDAQ-2015-011 Amendment No 2 Page 58 of 64
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
SR-NASDAQ-2015-011 Amendment No 2 Page 59 of 64
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
SR-NASDAQ-2015-011 Amendment No 2 Page 60 of 64
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 61 of 64
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
SR-NASDAQ-2015-011 Amendment No 2 Page 62 of 64
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
B Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
C Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received From Members Participants or Others
Written comments were neither solicited nor received
III Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Within 45 days of the date of publication of this notice in the Federal Register or
within such longer period (i) as the Commission may designate up to 90 days of such date
if it finds such longer period to be appropriate and publishes its reasons for so finding or
(ii) as to which the Exchange consents the Commission shall (a) by order approve or
disapprove such proposed rule change or (b) institute proceedings to determine whether
the proposed rule change should be disapproved
SR-NASDAQ-2015-011 Amendment No 2 Page 63 of 64
IV Solicitation of Comments
Interested persons are invited to submit written data views and arguments
concerning the foregoing including whether the proposed rule change is consistent with
the Act Comments may be submitted by any of the following methods
Electronic comments
bull Use the Commissionrsquos Internet comment form
(httpwwwsecgovrulessroshtml) or
bull Send an e-mail to rule-commentssecgov Please include File Number
SR-NASDAQ-2015-011 on the subject line
Paper comments
bull Send paper comments in triplicate to Brent J Fields Secretary Securities and
Exchange Commission Station Place 100 F Street NE Washington DC
20549-9303
All submissions should refer to File Number SR-NASDAQ-2015-011 This file number
should be included on the subject line if e-mail is used To help the Commission process
and review your comments more efficiently please use only one method The
Commission will post all comments on the Commissionrsquos Internet website
httpwwwsecgovrulessroshtml
Copies of the submission all subsequent amendments all written statements with
respect to the proposed rule change that are filed with the Commission and all written
communications relating to the proposed rule change between the Commission and any
person other than those that may be withheld from the public in accordance with the
provisions of 5 USC 552 will be available for website viewing and printing in the
Commissionrsquos Public Reference Room 100 F Street NE Washington DC 20549 on
SR-NASDAQ-2015-011 Amendment No 2 Page 64 of 64
official business days between the hours of 1000 am and 300 pm Copies of the filing
also will be available for inspection and copying at the principal office of Nasdaq All
comments received will be posted without change the Commission does not edit
personal identifying information from submissions You should submit only information
that you wish to make available publicly
All submissions should refer to File Number SR-NASDAQ-2015-011 and should
be submitted on or before [insert date 21 days from publication in the Federal Register]
For the Commission by the Division of Trading and Markets pursuant to
delegated authority41
Kevin M OrsquoNeill Deputy Secretary
17 CFR 20030-3(a)(12) 41
SR-NASDAQ-2015-011 Amendment No 2 Page 8 of 64
securities 13 floating-rate mortgage-backed securities14 floating-rate loans 15 and
investment companies16 (including investment companies advised by the Adviser) that
13 Asset-backed securities are securities that are backed by a pool of assets The Fund currently intends to invest in asset-backed securities that are consumer asset-backed securities
14 Mortgage-backed securities which are securities that directly or indirectly represent a participation in or are secured by and payable from mortgage loans on real property will consist of (1) residential mortgage-backed securities (ldquoRMBSrdquo) (2) commercial mortgage-backed securities (ldquoCMBSrdquo) (3) stripped mortgage-backed securities (ldquoSMBSrdquo) which are mortgage-backed securities where mortgage payments are divided between paying the loanrsquos principal and paying the loanrsquos interest (4) collateralized mortgage obligations (ldquoCMOsrdquo) and real estate mortgage investment conduits (ldquoREMICsrdquo) which are mortgage-backed securities that are divided into multiple classes with each class being entitled to a different share of the principal and interest payments received from the pool of underlying assets
15 The floating-rate loans in which the Fund will invest will represent amounts borrowed by companies or other entities from banks and other lenders and a significant portion of such floating-rate loans may be rated below investment grade or unrated Floating-rate loans held by the Fund may be senior or subordinate obligations of the borrower and may or may not be secured by collateral First lien senior secured floating-rate loans are referred to herein as ldquosenior loansrdquo Floating-rate loans that are not senior loans (ie unsecured floating-rate loans and secured floating-rate loans that are not first lien floating-rate loans) are referred to herein as ldquojunior loansrdquo The Fund will generally invest in floating-rate loans that the Adviser deems to be liquid with readily available prices notwithstanding the foregoing the Fund may invest in floating-rate loans that are deemed illiquid so long as the Fund complies with the 15 limitation on investments of its net assets in illiquid assets described below under ldquoInvestment Restrictionsrdquo
16 The Fund currently anticipates investing only in registered open-end investment companies that are listed and traded in the US on registered exchanges (ie other ETFs) An ETF is an investment company registered under the 1940 Act that holds a portfolio of securities Many ETFs are designed to track the performance of a securities index including industry sector country and region indexes The Fund may invest in the securities of ETFs in excess of the limits imposed under the 1940 Act pursuant to exemptive orders obtained by other ETFs and their sponsors from the Commission In addition the Fund may invest in the securities of certain investment companies in excess of the limits imposed under the 1940 Act pursuant to an exemptive order obtained by the Trust and the Adviser from the Commission See Investment Company Act Release No 30377
SR-NASDAQ-2015-011 Amendment No 2 Page 9 of 64
invest primarily in the foregoing types of debt instruments17 (collectively ldquoFloating Rate
Debt Instrumentsrdquo)
At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade To be considered
ldquoinvestment graderdquo under normal market conditions rated Floating Rate Debt
Instruments will carry at the time of purchase a rating in the highest four rating
categories of at least one nationally recognized statistical ratings organization
(ldquoNRSROrdquo) (eg BBB- or higher by Standard amp Poorrsquos Ratings Services (ldquoSampPrdquo)
andor Fitch Ratings (ldquoFitchrdquo) or Baa3 or higher by Moodyrsquos Investors Service Inc
(ldquoMoodyrsquosrdquo)18 For unrated securities to be considered ldquoinvestment graderdquo under normal
market conditions such securities will be determined at the time of purchase to be of
comparable quality19 by the Adviser The Fund may invest up to 35 of its net assets in
(February 5 2013) (File No 812-13895) The ETFs in which the Fund may invest include Index Fund Shares (as described in Nasdaq Rule 5705) Portfolio Depository Receipts (as described in Nasdaq Rule 5705) and Managed Fund Shares (as described in Nasdaq Rule 5735) While the Fund may invest in inverse ETFs the Fund will not invest in leveraged or inverse leveraged (eg 2X or -3X) ETFs
17 The liquidity of a security especially in the case of asset-backed and mortgage-backed securities will be a substantial factor in the Fundrsquos security selection process Consistent with the discussion below under ldquoInvestment Restrictionsrdquo the Fund will not purchase any Floating Rate Debt Instruments (including asset-backed securities and mortgage-backed securities) that in the Adviserrsquos opinion are illiquid if as a result more than 15 of the value of the Fundrsquos net assets will be invested in illiquid assets
18 For the avoidance of doubt if a security is rated by multiple NRSROs and receives different ratings the Fund will treat the security as being rated in the highest rating category received from an NRSRO
19 Comparable quality of unrated securities will be determined by the Adviser based on fundamental credit analysis of the unrated security and comparable NRSRO-rated securities On a best efforts basis the Adviser will attempt to make a rating
SR-NASDAQ-2015-011 Amendment No 2 Page 10 of 64
securities that are at the time of investment rated below investment grade by each
NRSRO rating such securities (or securities that are unrated and determined by the
Adviser to be of comparable quality) commonly referred to as ldquohigh yieldrdquo or ldquojunkrdquo
bonds If subsequent to purchase by the Fund a security held by the Fund experiences a
decline in credit quality and falls below investment grade the Fund may continue to hold
the security and it will not cause the Fund to violate the 35 investment limitation
however the security will be taken into account for purposes of determining whether
purchases of additional securities will cause the Fund to violate such limitation
The Fund will limit its investments in asset-backed securities (excluding agency
mortgage-backed securities) and non-agency mortgage-backed securities (in the
aggregate) to 20 of its net assets20 In addition the Fund will limit its investments in
junior loans to 20 of its net assets
The Fund will hold debt securities (including in the aggregate Floating Rate
Debt Instruments and the fixed-rate debt securities described below) of at least 13
non-affiliated issuers
Other Investments
Under normal market conditions the Fund will invest primarily in the Floating
Rate Debt Instruments described above to meet its investment objective In addition the
determination based on publicly available data In making a ldquocomparable qualityrdquo determination the Adviser may consider for example whether the issuer of the security has issued other rated securities the nature and provisions of the relevant security whether the obligations under the relevant security are guaranteed by another entity and the rating of such guarantor (if any) relevant cash flows macroeconomic analysis andor sector or industry analysis
For the avoidance of doubt there is no limitation on the Fundrsquos investments in agency mortgage-backed securities
20
SR-NASDAQ-2015-011 Amendment No 2 Page 11 of 64
Fund may invest up to 20 of its net assets in the following types of fixed-rate debt
securities corporate21 and government bonds and notes agency securities22 instruments
of non-US issuers in developed markets privately-issued securities 23 asset-backed
securities 24 mortgage-backed securities 25 municipal bonds money market securities26
and investment companies27 (including investment companies advised by the Adviser)
that invest primarily in the foregoing types of debt securities
Further to pursue its investment objective the Fund may invest up to 20 of the
value of its net assets in exchange-listed options on US Treasury futures contracts and
exchange-listed US Treasury futures contracts28 The use of these derivative
transactions may allow the Fund to obtain net long or short exposures to selected interest
rates These derivatives may also be used to hedge risks including interest rate risks and
21 See footnote 10 above
22 See footnote 11 above
23 See footnote 12 above
24 See footnote 13 above
25 See footnote 14 above
26 ldquoMoney market securitiesrdquo for these purposes generally includes short-term high-quality obligations issued or guaranteed by the US Treasury or the agencies or instrumentalities of the US government short-term high-quality securities issued or guaranteed by non-US governments agencies and instrumentalities repurchase agreements commercial paper (both asset-backed and non-assetshybacked) and deposits and other obligations of US and non-US banks and financial institutions
27 See footnote 16 above
28 At least 90 of the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be invested in instruments that trade in markets that are members of the Intermarket Surveillance Group (ldquoISGrdquo) (see footnote 40 below) or are parties to a comprehensive surveillance sharing agreement with the Exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 12 of 64
credit risks associated with the Fundrsquos portfolio investments The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index
Investment Restrictions
The Fund will not invest 25 or more of the value of its total assets in securities
of issuers in any one industry This restriction does not apply to (a) obligations issued or
guaranteed by the US government its agencies or instrumentalities or (b) securities of
other investment companies29
The Fund may hold up to an aggregate amount of 15 of its net assets in illiquid
assets (calculated at the time of investment) including Rule 144A securities deemed
illiquid by the Adviser30 The Fund will monitor its portfolio liquidity on an ongoing
basis to determine whether in light of current circumstances an adequate level of
liquidity is being maintained and will consider taking appropriate steps in order to
maintain adequate liquidity if through a change in values net assets or other
circumstances more than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid
assets include securities subject to contractual or other restrictions on resale and other
29 See Form N-1A Item 9 The Commission has taken the position that a fund is concentrated if it invests more than 25 of the value of its total assets in any one industry See eg Investment Company Act Release No 9011 (October 30 1975) 40 FR 54241 (November 21 1975)
30 In reaching liquidity decisions the Adviser may consider the following factors the frequency of trades and quotes for the security the number of dealers wishing to purchase or sell the security and the number of other potential purchasers dealer undertakings to make a market in the security and the nature of the security and the nature of the marketplace in which it trades (eg the time needed to dispose of the security the method of soliciting offers and the mechanics of transfer)
SR-NASDAQ-2015-011 Amendment No 2 Page 13 of 64
instruments that lack readily available markets as determined in accordance with
Commission staff guidance31
The Fund will not invest in non-US equity securities
Creation and Redemption of Shares
The Fund will issue and redeem Shares on a continuous basis at net asset value
(ldquoNAVrdquo)32 only in large blocks of Shares (ldquoCreation Unitsrdquo) in transactions with
authorized participants generally including broker-dealers and large institutional
investors (ldquoAuthorized Participantsrdquo) Creation Units generally will consist of 50000
Shares although this may change from time to time Creation Units however are not
expected to consist of less than 50000 Shares As described in the Registration
Statement and consistent with the Exemptive Relief the Fund will issue and redeem
Creation Units in exchange for an in-kind portfolio of instruments andor cash in lieu of
31 The Commission has stated that long-standing Commission guidelines have required open-end funds to hold no more than 15 of their net assets in illiquid securities and other illiquid assets See Investment Company Act Release No 28193 (March 11 2008) 73 FR 14618 (March 18 2008) footnote 34 See also Investment Company Act Release No 5847 (October 21 1969) 35 FR 19989 (December 31 1970) (Statement Regarding ldquoRestricted Securitiesrdquo) Investment Company Act Release No 18612 (March 12 1992) 57 FR 9828 (March 20 1992) (Revisions of Guidelines to Form N-1A) A fundrsquos portfolio security is illiquid if it cannot be disposed of in the ordinary course of business within seven days at approximately the value ascribed to it by the fund See Investment Company Act Release No 14983 (March 12 1986) 51 FR 9773 (March 21 1986) (adopting amendments to Rule 2a-7 under the 1940 Act) Investment Company Act Release No 17452 (April 23 1990) 55 FR 17933 (April 30 1990) (adopting Rule 144A under the Securities Act of 1933)
32 The NAV of the Fundrsquos Shares generally will be calculated once daily Monday through Friday as of the close of regular trading on the New York Stock Exchange generally 400 pm Eastern Time (the ldquoNAV Calculation Timerdquo) NAV per Share will be calculated by dividing the Fundrsquos net assets by the number of Fund Shares outstanding For more information regarding the valuation of Fund investments in calculating the Fundrsquos NAV see the Registration Statement
SR-NASDAQ-2015-011 Amendment No 2 Page 14 of 64
such instruments (the ldquoCreation Basketrdquo) In addition if there is a difference between the
NAV attributable to a Creation Unit and the market value of the Creation Basket
exchanged for the Creation Unit the party conveying instruments with the lower value
will pay to the other an amount in cash equal to the difference (referred to as the ldquoCash
Componentrdquo)
Creations and redemptions must be made by or through an Authorized Participant
that has executed an agreement that has been agreed to by the Distributor and BNY with
respect to creations and redemptions of Creation Units All standard orders to create
Creation Units must be received by the transfer agent no later than the closing time of the
regular trading session on the New York Stock Exchange (ordinarily 400 pm Eastern
Time) (the ldquoClosing Timerdquo) in each case on the date such order is placed in order for the
creation of Creation Units to be effected based on the NAV of Shares as next determined
on such date after receipt of the order in proper form Shares may be redeemed only in
Creation Units at their NAV next determined after receipt not later than the Closing Time
of a redemption request in proper form by the Fund through the transfer agent and only
on a business day
The Fundrsquos custodian through the National Securities Clearing Corporation will
make available on each business day prior to the opening of business of the Exchange
the list of the names and quantities of the instruments comprising the Creation Basket as
well as the estimated Cash Component (if any) for that day The published Creation
Basket will apply until a new Creation Basket is announced on the following business
day prior to commencement of trading in the Shares
SR-NASDAQ-2015-011 Amendment No 2 Page 15 of 64
Net Asset Value
The Fundrsquos NAV will be determined as of the close of trading (normally
400 pm Eastern Time) on each day the New York Stock Exchange is open for
business NAV will be calculated for the Fund by taking the market price of the Fundrsquos
total assets including interest or dividends accrued but not yet collected less all
liabilities and dividing such amount by the total number of Shares outstanding The
result rounded to the nearest cent will be the NAV per Share All valuations will be
subject to review by the Board of Trustees of the Trust (ldquoTrust Boardrdquo) or its delegate
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with valuation procedures (which may be revised from time to time) adopted by the Trust
Board (the ldquoValuation Proceduresrdquo) and in accordance with the 1940 Act A market
valuation generally means a valuation (i) obtained from an exchange an independent
pricing service (ldquoPricing Servicerdquo) or a major market maker (or dealer) or (ii) based on a
price quotation or other equivalent indication of value supplied by an exchange a Pricing
Service or a major market maker (or dealer) The information summarized below is
based on the Valuation Procedures as currently in effect however as noted above the
Valuation Procedures are amended from time to time and therefore such information is
subject to change
Certain securities including Floating Rate Debt Instruments in which the Fund
may invest will not be listed on any securities exchange or board of trade Such
securities will typically be bought and sold by institutional investors in individually
negotiated private transactions that function in many respects like an over-the-counter
SR-NASDAQ-2015-011 Amendment No 2 Page 16 of 64
secondary market although typically no formal market makers will exist Certain
securities particularly debt securities will have few or no trades or trade infrequently
and information regarding a specific security may not be widely available or may be
incomplete Accordingly determinations of the fair value of debt securities may be
based on infrequent and dated information Because there is less reliable objective data
available elements of judgment may play a greater role in valuation of debt securities
than for other types of securities Typically Floating Rate Debt Instruments and other
debt securities in which the Fund may invest (other than those described below) will be
valued using information provided by a Pricing Service Debt securities having a
remaining maturity of 60 days or less when purchased will be valued at cost adjusted for
amortization of premiums and accretion of discounts provided the Adviserrsquos pricing
committee (the ldquoPricing Committeerdquo) has determined that the use of amortized cost is an
appropriate reflection of fair value given market and issuer-specific conditions existing at
the time of the determination Overnight repurchase agreements will be valued at cost
and term repurchase agreements (ie those whose maturity exceeds seven days) will be
valued at the average of the bid quotations obtained daily from at least two recognized
dealers
Asset-backed and mortgage-backed securities will generally be valued by using a
Pricing Service If a Pricing Service does not cover a particular asset-backed or
mortgage-backed security or discontinues covering a particular asset-backed or
mortgage-backed security the security will be priced using broker quotes generally
provided by brokers that make or participate in markets in the security To derive values
Pricing Services and broker-dealers may use matrix pricing and valuation models as well
SR-NASDAQ-2015-011 Amendment No 2 Page 17 of 64
as recent market transactions for the same or similar assets As it deems appropriate the
Pricing Committee may determine that a Pricing Service price does not represent an
accurate value of an asset-backed or mortgage-backed security based on broker quotes it
receives a recent trade in the security by the Fund information from a portfolio manager
or other market information In the event that the Pricing Committee determines that the
Pricing Service price is unreliable or inaccurate based on such other information broker
quotes may be used Additionally if the Pricing Committee determines that the price of
an asset-backed or mortgage-backed security obtained from a Pricing Service and
available broker quotes is unreliable or inaccurate due to market conditions or other
reasons or if a Pricing Service price or broker quote is unavailable the security will be
valued using fair value pricing as described below
Equity securities listed on any exchange other than the Exchange will be valued at
the last sale price on the exchange on which they are principally traded on the business
day as of which such value is being determined Equity securities listed on the Exchange
will be valued at the official closing price on the business day as of which such value is
being determined If there has been no sale on such day or no official closing price in
the case of securities traded on the Exchange the securities will be valued using fair
value pricing as described below Equity securities traded on more than one securities
exchange will be valued at the last sale price or official closing price as applicable on
the business day as of which such value is being determined at the close of the exchange
representing the principal market for such securities
Exchange-traded options and futures contracts will be valued at the closing price
in the market where such contracts are principally traded
SR-NASDAQ-2015-011 Amendment No 2 Page 18 of 64
Certain securities including Floating Rate Debt Instruments in which the Fund
will invest will not be able to be priced by pre-established pricing methods Such
securities may be valued by the Trust Board or its delegate at fair value The use of fair
value pricing by the Fund will be governed by the Valuation Procedures and conducted in
accordance with the provisions of the 1940 Act Valuing the Fundrsquos securities using fair
value pricing will result in using prices for those securities that may differ from current
market valuations or official closing prices on the applicable exchange
Availability of Information
The Fundrsquos website (wwwftportfolioscom) which will be publicly available
prior to the public offering of Shares will include a form of the prospectus for the Fund
that may be downloaded The website will include the Sharesrsquo ticker CUSIP and
exchange information along with additional quantitative information updated on a daily
basis including for the Fund (1) daily trading volume the prior business dayrsquos reported
NAV and closing price mid-point of the bidask spread at the time of calculation of such
NAV (the ldquoBidAsk Pricerdquo)33 and a calculation of the premium and discount of the
BidAsk Price against the NAV and (2) data in chart format displaying the frequency
distribution of discounts and premiums of the daily BidAsk Price against the NAV
within appropriate ranges for each of the four previous calendar quarters On each
business day before commencement of trading in Shares in the Regular Market Session34
33 The BidAsk Price of the Fund will be determined using the mid-point of the highest bid and the lowest offer on the Exchange as of the time of calculation of the Fundrsquos NAV The records relating to BidAsk Prices will be retained by the Fund and its service providers
34 See Nasdaq Rule 4120(b)(4) (describing the three trading sessions on the Exchange (1) Pre-Market Session from 4 am to 930 am Eastern Time (2)
SR-NASDAQ-2015-011 Amendment No 2 Page 19 of 64
on the Exchange the Fund will disclose on its website the identities and quantities of the
portfolio of securities and other assets (the ldquoDisclosed Portfoliordquo as defined in Nasdaq
Rule 5735(c)(2)) held by the Fund that will form the basis for the Fundrsquos calculation of
NAV at the end of the business day 35 The Fundrsquos disclosure of derivative positions in
the Disclosed Portfolio will include information that market participants can use to value
these positions intraday On a daily basis the Fund will disclose on the Fundrsquos website
the following information regarding each portfolio holding as applicable to the type of
holding ticker symbol CUSIP number or other identifier if any a description of the
holding (including the type of holding) the identity of the security or other asset or
instrument underlying the holding if any for options the option strike price quantity
held (as measured by for example par value notional value or number of shares
contracts or units) maturity date if any coupon rate if any effective date if any market
value of the holding and percentage weighting of the holding in the Fundrsquos portfolio
The website information will be publicly available at no charge
In addition for the Fund an estimated value defined in Rule 5735(c)(3) as the
ldquoIntraday Indicative Valuerdquo that reflects an estimated intraday value of the Fundrsquos
Disclosed Portfolio will be disseminated Moreover the Intraday Indicative Value
Regular Market Session from 930 am to 4 pm or 415 pm Eastern Time and (3) Post-Market Session from 4 pm or 415 pm to 8 pm Eastern Time)
Under accounting procedures to be followed by the Fund trades made on the prior business day (ldquoTrdquo) will be booked and reflected in NAV on the current business day (ldquoT+1rdquo) Accordingly the Fund will be able to disclose at the beginning of the business day the portfolio that will form the basis for the NAV calculation at the end of the business day
35
SR-NASDAQ-2015-011 Amendment No 2 Page 20 of 64
available on the NASDAQ OMX Information LLC proprietary index data service36 will
be based upon the current value for the components of the Disclosed Portfolio and will be
updated and widely disseminated by one or more major market data vendors and broadly
displayed at least every 15 seconds during the Regular Market Session The Intraday
Indicative Value will be based on quotes and closing prices from the securitiesrsquo local
market and may not reflect events that occur subsequent to the local marketrsquos close
Premiums and discounts between the Intraday Indicative Value and the market price may
occur This should not be viewed as a ldquoreal timerdquo update of the NAV per Share of the
Fund which is calculated only once a day
The dissemination of the Intraday Indicative Value together with the Disclosed
Portfolio will allow investors to determine the value of the underlying portfolio of the
Fund on a daily basis and will provide a close estimate of that value throughout the
trading day
Investors will also be able to obtain the Fundrsquos Statement of Additional
Information (ldquoSAIrdquo) the Fundrsquos annual and semi-annual reports (together ldquoShareholder
Reportsrdquo) and its Form N-CSR and Form N-SAR filed twice a year The Fundrsquos SAI
and Shareholder Reports will be available free upon request from the Fund and those
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or
downloaded from the Commissionrsquos website at wwwsecgov Information regarding
market price and trading volume of the Shares will be continually available on a real-time
Currently the NASDAQ OMX Global Index Data Service (ldquoGIDSrdquo) is the NASDAQ OMX global index data feed service offering real-time updates daily summary messages and access to widely followed indexes and Intraday Indicative Values for ETFs GIDS provides investment professionals with the daily information needed to track or trade NASDAQ OMX indexes listed ETFs or third-party partner indexes and ETFs
36
SR-NASDAQ-2015-011 Amendment No 2 Page 21 of 64
basis throughout the day on brokersrsquo computer screens and other electronic services
Information regarding the previous dayrsquos closing price and trading volume information
for the Shares will be published daily in the financial section of newspapers Quotation
and last sale information for the Shares will be available via Nasdaq proprietary quote
and trade services as well as in accordance with the Unlisted Trading Privileges and the
Consolidated Tape Association (ldquoCTArdquo) plans for the Shares Quotation and last sale
information for the other ETFs in which the Fund will invest will be available via the
quote and trade services of their respective primary exchanges as well as in accordance
with the Unlisted Trading Privileges and the CTA plans as applicable Quotation and
last sale information for US exchange-traded options will be available via the Options
Price Reporting Authority Intraday executable price quotations on Floating Rate Debt
Instruments and other assets not traded on an exchange will be available from major
broker-dealer firms or market data vendors as well as from automated quotation systems
published or other public sources or online information services Additionally the Trade
Reporting and Compliance Engine (ldquoTRACErdquo) of the Financial Industry Regulatory
Authority (ldquoFINRArdquo) will be a source of price information for corporate bonds
privately-issued securities mortgage-backed securities and asset-backed securities to the
extent transactions in such securities are reported to TRACE37 For exchange-traded
assets intraday pricing information will be available directly from the applicable listing
exchange
Broker-dealers that are FINRA member firms have an obligation to report transactions in specified debt securities to TRACE to the extent required under applicable FINRA rules Generally such debt securities will have at issuance a maturity that exceeds one calendar year
37
SR-NASDAQ-2015-011 Amendment No 2 Page 22 of 64
Additional information regarding the Fund and the Shares including investment
strategies risks creation and redemption procedures fees Fund holdings disclosure
policies distributions and taxes will be included in the Registration Statement
Initial and Continued Listing
The Shares will be subject to Rule 5735 which sets forth the initial and continued
listing criteria applicable to Managed Fund Shares The Exchange represents that for
initial andor continued listing the Fund must be in compliance with Rule 10A-338 under
the Act A minimum of 100000 Shares will be outstanding at the commencement of
trading on the Exchange The Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the NAV and the
Disclosed Portfolio will be made available to all market participants at the same time
Trading Halts
With respect to trading halts the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading in the Shares of the Fund Nasdaq will
halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12) Trading may be
halted because of market conditions or for reasons that in the view of the Exchange
make trading in the Shares inadvisable These may include (1) the extent to which
trading is not occurring in the securities andor the other assets constituting the Disclosed
Portfolio of the Fund or (2) whether other unusual conditions or circumstances
detrimental to the maintenance of a fair and orderly market are present Trading in the
See 17 CFR 24010A-3 38
SR-NASDAQ-2015-011 Amendment No 2 Page 23 of 64
Shares also will be subject to Rule 5735(d)(2)(D) which sets forth circumstances under
which Shares of the Fund may be halted
Trading Rules
Nasdaq deems the Shares to be equity securities thus rendering trading in the
Shares subject to Nasdaqrsquos existing rules governing the trading of equity securities
Nasdaq will allow trading in the Shares from 400 am until 800 pm Eastern Time
The Exchange has appropriate rules to facilitate transactions in the Shares during all
trading sessions As provided in Nasdaq Rule 5735(b)(3) the minimum price variation
for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $001
Surveillance
The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws39 The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities laws
The surveillances referred to above generally focus on detecting securities trading
outside their normal patterns which could be indicative of manipulative or other violative
activity When such situations are detected surveillance analysis follows and
investigations are opened where appropriate to review the behavior of all relevant
parties for all relevant trading violations
FINRA surveils trading on the Exchange pursuant to a regulatory services agreement The Exchange is responsible for FINRArsquos performance under this regulatory services agreement
39
SR-NASDAQ-2015-011 Amendment No 2 Page 24 of 64
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 25 of 64
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
b Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
SR-NASDAQ-2015-011 Amendment No 2 Page 26 of 64
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
SR-NASDAQ-2015-011 Amendment No 2 Page 27 of 64
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
SR-NASDAQ-2015-011 Amendment No 2 Page 28 of 64
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
SR-NASDAQ-2015-011 Amendment No 2 Page 29 of 64
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
SR-NASDAQ-2015-011 Amendment No 2 Page 30 of 64
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
SR-NASDAQ-2015-011 Amendment No 2 Page 31 of 64
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
4 Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
5 Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received from Members Participants or Others
Written comments were neither solicited nor received
6 Extension of Time Period for Commission Action
The Exchange does not consent at this time to an extension of any time period for
Commission action
7 Basis for Summary Effectiveness Pursuant to Section 19(b)(3) or for Accelerated Effectiveness Pursuant to Section 19(b)(2)
Not applicable
8 Proposed Rule Change Based on Rules of Another Self-Regulatory Organization or of the Commission
Not applicable
9 Security-Based Swap Submissions Filed Pursuant to Section 3C of the Act
Not applicable
SR-NASDAQ-2015-011 Amendment No 2 Page 32 of 64
10 Advance Notices Filed Pursuant to Section 806(e) of the Payment Clearing and Settlement Supervision Act
Not applicable
11 Exhibits
1 Completed notice of proposed rule change for publication in the Federal
Register
SR-NASDAQ-2015-011 Amendment No 2 Page 33 of 64
EXHIBIT 1
SECURITIES AND EXCHANGE COMMISSION (Release No 34shy File No SR-NASDAQ-2015-011)
April __ 2015
Self-Regulatory Organizations The NASDAQ Stock Market LLC Notice of Filing of Proposed Rule Change Relating to the Listing and Trading of the Shares of the First Trust Strategic Floating Rate ETF of First Trust Exchange-Traded Fund IV
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (ldquoActrdquo)1 and
Rule 19b-4 thereunder2 notice is hereby given that on February 12 2015 The NASDAQ
Stock Market LLC (ldquoNasdaqrdquo or the ldquoExchangerdquo) filed with the Securities and Exchange
Commission (ldquoCommissionrdquo) the proposed rule change as described in in Items I II and
III below which Items have been prepared by Nasdaq On April 6 2015 Nasdaq filed
Amendment No 1 which replaced the text of the original filing in its entirety On April
15 2015 Nasdaq filed Amendment No 2 which replaced the text of the original filing in
its entirety The Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons
I Self-Regulatory Organizationrsquos Statement of the Terms of Substance of the Proposed Rule Change
Nasdaq proposes to list and trade the shares of the First Trust Strategic Floating
Rate ETF (the ldquoFundrdquo) of the First Trust Strategic Floating Rate ETF (the ldquoFundrdquo) of
First Trust Exchange-Traded Fund IV (the ldquoTrustrdquo) under Nasdaq Rule 5735 (ldquoManaged
1 15 USC 78s(b)(1)
2 17 CFR 24019b-4
SR-NASDAQ-2015-011 Amendment No 2 Page 34 of 64
Fund Sharesrdquo)3 The shares of the Fund are collectively referred to herein as the
ldquoSharesrdquo
The text of the proposed rule change is available at
httpnasdaqcchwallstreetcom at Nasdaqrsquos principal office and at the Commissionrsquos
Public Reference Room
II Self-Regulatory Organizationrsquos Statement of the Purpose of and Statutory Basis for the Proposed Rule Change
In its filing with the Commission Nasdaq included statements concerning the
purpose of and basis for the proposed rule change The text of these statements may be
examined at the places specified in Item IV below Nasdaq has prepared summaries set
forth in Sections A B and C below of the most significant aspects of such statements
A Self-Regulatory Organizationrsquos Statement of the Purpose of and Statutory Basis for the Proposed Rule Change
1 Purpose
The Exchange proposes to list and trade the Shares of the Fund under Nasdaq
Rule 5735 which governs the listing and trading of Managed Fund Shares4 on the
3 The Commission approved Nasdaq Rule 5735 in Securities Exchange Act Release No 57962 (June 13 2008) 73 FR 35175 (June 20 2008) (SR-NASDAQ-2008shy039) There are already multiple actively-managed funds listed on the Exchange see eg Securities Exchange Act Release Nos 69464 (April 26 2013) 78 FR 25774 (May 2 2013) (SR-NASDAQ-2013-036) (order approving listing and trading of First Trust Senior Loan Fund) 68972 (February 22 2013) 78 FR 13721 (February 28 2013) (SR-NASDAQ-2012-147) (order approving listing and trading of First Trust High Yield LongShort ETF) 66489 (February 29 2012) 77 FR 13379 (March 6 2012) (SR-NASDAQ-2012-004) (order approving listing and trading of WisdomTree Emerging Markets Corporate Bond Fund) The Exchange believes the proposed rule change raises no significant issues not previously addressed in those prior Commission orders
4 A Managed Fund Share is a security that represents an interest in an investment company registered under the Investment Company Act of 1940 (15 USC 80ashy
SR-NASDAQ-2015-011 Amendment No 2 Page 35 of 64
Exchange The Fund will be an actively-managed exchange-traded fund (ldquoETFrdquo) The
Shares will be offered by the Trust which was established as a Massachusetts business
trust on September 15 20105 The Trust is registered with the Commission as an
investment company and has filed a registration statement on Form N-1A (ldquoRegistration
Statementrdquo) with the Commission6 The Fund will be a series of the Trust The Fund
intends to qualify each year as a regulated investment company (ldquoRICrdquo) under
Subchapter M of the Internal Revenue Code of 1986 as amended
First Trust Advisors LP will be the investment adviser (ldquoAdviserrdquo) to the Fund
First Trust Portfolios LP (the ldquoDistributorrdquo) will be the principal underwriter and
distributor of the Fundrsquos Shares The Bank of New York Mellon Corporation (ldquoBNYrdquo)
will act as the administrator accounting agent custodian and transfer agent to the Fund
1) (the ldquo1940 Actrdquo) organized as an open-end investment company or similar entity that invests in a portfolio of securities selected by its investment adviser consistent with its investment objectives and policies In contrast an open-end investment company that issues Index Fund Shares listed and traded on the Exchange under Nasdaq Rule 5705 seeks to provide investment results that correspond generally to the price and yield performance of a specific foreign or domestic stock index fixed income securities index or combination thereof
5 The Commission has issued an order upon which the Trust may rely granting certain exemptive relief under the 1940 Act See Investment Company Act Release No 30029 (April 10 2012) (File No 812-13795) (the ldquoExemptive Reliefrdquo) In addition the Commission has issued no-action relief upon which the Trust may rely pertaining to the Fundrsquos ability to invest in derivatives notwithstanding certain representations in the application for the Exemptive Relief See Commission No-Action Letter (December 6 2012)
6 See Post-Effective Amendment No 104 to Registration Statement on Form N-1A for the Trust dated January 29 2015 (File Nos 333-174332 and 811-22559) The descriptions of the Fund and the Shares contained herein are based in part on information in the Registration Statement
7
SR-NASDAQ-2015-011 Amendment No 2 Page 36 of 64
Paragraph (g) of Rule 5735 provides that if the investment adviser to the
investment company issuing Managed Fund Shares is affiliated with a broker-dealer
such investment adviser shall erect a ldquofire wallrdquo between the investment adviser and the
broker-dealer with respect to access to information concerning the composition andor
changes to such investment company portfolio7 In addition paragraph (g) further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio Rule 5735(g) is similar
to Nasdaq Rule 5705(b)(5)(A)(i) however paragraph (g) in connection with the
establishment of a ldquofire wallrdquo between the investment adviser and the broker-dealer
reflects the applicable open-end fundrsquos portfolio not an underlying benchmark index as
is the case with index-based funds The Adviser is not a broker-dealer although it is
affiliated with the Distributor a broker-dealer The Adviser has implemented a fire wall
An investment adviser to an open-end fund is required to be registered under the Investment Advisers Act of 1940 (the ldquoAdvisers Actrdquo) As a result the Adviser and its related personnel are subject to the provisions of Rule 204A-1 under the Advisers Act relating to codes of ethics This Rule requires investment advisers to adopt a code of ethics that reflects the fiduciary nature of the relationship to clients as well as compliance with other applicable securities laws Accordingly procedures designed to prevent the communication and misuse of non-public information by an investment adviser must be consistent with Rule 204A-1 under the Advisers Act In addition Rule 206(4)-7 under the Advisers Act makes it unlawful for an investment adviser to provide investment advice to clients unless such investment adviser has (i) adopted and implemented written policies and procedures reasonably designed to prevent violation by the investment adviser and its supervised persons of the Advisers Act and the Commission rules adopted thereunder (ii) implemented at a minimum an annual review regarding the adequacy of the policies and procedures established pursuant to subparagraph (i) above and the effectiveness of their implementation and (iii) designated an individual (who is a supervised person) responsible for administering the policies and procedures adopted under subparagraph (i) above
8
SR-NASDAQ-2015-011 Amendment No 2 Page 37 of 64
with respect to its broker-dealer affiliate regarding access to information concerning the
composition andor changes to the portfolio In addition personnel who make decisions
on the Fundrsquos portfolio composition will be subject to procedures designed to prevent the
use and dissemination of material non-public information regarding the Fundrsquos portfolio
In the event (a) the Adviser becomes or becomes newly affiliated with a broker-dealer
or (b) any new adviser or sub-adviser is a registered broker-dealer or becomes affiliated
with another broker-dealer it will implement a fire wall with respect to its relevant
personnel andor such broker-dealer affiliate as applicable regarding access to
information concerning the composition andor changes to the portfolio and will be
subject to procedures designed to prevent the use and dissemination of material
non-public information regarding such portfolio The Fund does not currently intend to
use a sub-adviser
First Trust Strategic Floating Rate ETF
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions8 at least 80 of its
The term ldquounder normal market conditionsrdquo as used herein includes but is not limited to the absence of adverse market economic political or other conditions including extreme volatility or trading halts in the fixed income markets or the financial markets generally operational issues causing dissemination of inaccurate market information or force majeure type events such as systems failure natural or man-made disaster act of God armed conflict act of terrorism riot or labor disruption or any similar intervening circumstance For temporary defensive purposes during the initial invest-up period and during periods of high cash inflows or outflows the Fund may depart from its principal investment strategies for example it may hold a higher than normal proportion of its assets in cash During such periods the Fund may not be able to achieve its investment objective The Fund may adopt a defensive strategy when the Adviser believes securities in which the Fund normally invests have elevated risks due to political or economic factors and in other extraordinary circumstances
SR-NASDAQ-2015-011 Amendment No 2 Page 38 of 64
net assets in a portfolio of the following types of floating-rate9 debt instruments issued by
US and non-US public- and private-sector entities floating-rate corporate10 and
government bonds and notes floating-rate agency securities 11 floating-rate instruments
of non-US issuers floating-rate privately-issued securities 12 floating-rate asset-backed
securities 13 floating-rate mortgage-backed securities14 floating-rate loans 15 and
9 For the avoidance of doubt the term ldquofloating-raterdquo shall also include similar terms such as ldquovariable-raterdquo and ldquoadjustable-raterdquo
10 The Adviser expects that under normal market conditions generally for a corporate bond to be considered as an eligible investment after taking into account such an investment at least 75 of the Fundrsquos net assets that are invested in floating-rate corporate bonds and as described below fixed-rate corporate bonds (in the aggregate) will be comprised of corporate bonds that have at the time of original issuance $100 million or more par amount outstanding
11 ldquoAgency securitiesrdquo for these purposes generally includes securities issued by the following entities Government National Mortgage Association (Ginnie Mae) Federal National Mortgage Association (Fannie Mae) Federal Home Loan Banks (FHLBanks) Federal Home Loan Mortgage Corporation (Freddie Mac) Farm Credit System (FCS) Farm Credit Banks (FCBanks) Student Loan Marketing Association (Sallie Mae) Resolution Funding Corporation (REFCORP) Financing Corporation (FICO) and the Farm Credit System (FCS) Financial Assistance Corporation (FAC) Agency securities can include but are not limited to mortgage-backed securities
12 ldquoPrivately-issued securitiesrdquo for these purposes generally includes Rule 144A securities other than mortgage-backed Rule 144A securities Under normal market conditions privately-issued securities will have at the time of original issuance $100 million or more principal amount outstanding to be considered eligible investments
13 Asset-backed securities are securities that are backed by a pool of assets The Fund currently intends to invest in asset-backed securities that are consumer asset-backed securities
14 Mortgage-backed securities which are securities that directly or indirectly represent a participation in or are secured by and payable from mortgage loans on real property will consist of (1) residential mortgage-backed securities (ldquoRMBSrdquo) (2) commercial mortgage-backed securities (ldquoCMBSrdquo) (3) stripped mortgage-backed securities (ldquoSMBSrdquo) which are mortgage-backed securities
SR-NASDAQ-2015-011 Amendment No 2 Page 39 of 64
investment companies16 (including investment companies advised by the Adviser) that
invest primarily in the foregoing types of debt instruments17 (collectively ldquoFloating Rate
Debt Instrumentsrdquo)
where mortgage payments are divided between paying the loanrsquos principal and paying the loanrsquos interest (4) collateralized mortgage obligations (ldquoCMOsrdquo) and real estate mortgage investment conduits (ldquoREMICsrdquo) which are mortgage-backed securities that are divided into multiple classes with each class being entitled to a different share of the principal and interest payments received from the pool of underlying assets
15 The floating-rate loans in which the Fund will invest will represent amounts borrowed by companies or other entities from banks and other lenders and a significant portion of such floating-rate loans may be rated below investment grade or unrated Floating-rate loans held by the Fund may be senior or subordinate obligations of the borrower and may or may not be secured by collateral First lien senior secured floating-rate loans are referred to herein as ldquosenior loansrdquo Floating-rate loans that are not senior loans (ie unsecured floating-rate loans and secured floating-rate loans that are not first lien floating-rate loans) are referred to herein as ldquojunior loansrdquo The Fund will generally invest in floating-rate loans that the Adviser deems to be liquid with readily available prices notwithstanding the foregoing the Fund may invest in floating-rate loans that are deemed illiquid so long as the Fund complies with the 15 limitation on investments of its net assets in illiquid assets described below under ldquoInvestment Restrictionsrdquo
16 The Fund currently anticipates investing only in registered open-end investment companies that are listed and traded in the US on registered exchanges (ie other ETFs) An ETF is an investment company registered under the 1940 Act that holds a portfolio of securities Many ETFs are designed to track the performance of a securities index including industry sector country and region indexes The Fund may invest in the securities of ETFs in excess of the limits imposed under the 1940 Act pursuant to exemptive orders obtained by other ETFs and their sponsors from the Commission In addition the Fund may invest in the securities of certain investment companies in excess of the limits imposed under the 1940 Act pursuant to an exemptive order obtained by the Trust and the Adviser from the Commission See Investment Company Act Release No 30377 (February 5 2013) (File No 812-13895) The ETFs in which the Fund may invest include Index Fund Shares (as described in Nasdaq Rule 5705) Portfolio Depository Receipts (as described in Nasdaq Rule 5705) and Managed Fund Shares (as described in Nasdaq Rule 5735) While the Fund may invest in inverse ETFs the Fund will not invest in leveraged or inverse leveraged (eg 2X or -3X) ETFs
SR-NASDAQ-2015-011 Amendment No 2 Page 40 of 64
At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade To be considered
ldquoinvestment graderdquo under normal market conditions rated Floating Rate Debt
Instruments will carry at the time of purchase a rating in the highest four rating
categories of at least one nationally recognized statistical ratings organization
(ldquoNRSROrdquo) (eg BBB- or higher by Standard amp Poorrsquos Ratings Services (ldquoSampPrdquo)
andor Fitch Ratings (ldquoFitchrdquo) or Baa3 or higher by Moodyrsquos Investors Service Inc
(ldquoMoodyrsquosrdquo)18 For unrated securities to be considered ldquoinvestment graderdquo under normal
market conditions such securities will be determined at the time of purchase to be of
comparable quality19 by the Adviser The Fund may invest up to 35 of its net assets in
securities that are at the time of investment rated below investment grade by each
NRSRO rating such securities (or securities that are unrated and determined by the
17 The liquidity of a security especially in the case of asset-backed and mortgage-backed securities will be a substantial factor in the Fundrsquos security selection process Consistent with the discussion below under ldquoInvestment Restrictionsrdquo the Fund will not purchase any Floating Rate Debt Instruments (including asset-backed securities and mortgage-backed securities) that in the Adviserrsquos opinion are illiquid if as a result more than 15 of the value of the Fundrsquos net assets will be invested in illiquid assets
18 For the avoidance of doubt if a security is rated by multiple NRSROs and receives different ratings the Fund will treat the security as being rated in the highest rating category received from an NRSRO
19 Comparable quality of unrated securities will be determined by the Adviser based on fundamental credit analysis of the unrated security and comparable NRSRO-rated securities On a best efforts basis the Adviser will attempt to make a rating determination based on publicly available data In making a ldquocomparable qualityrdquo determination the Adviser may consider for example whether the issuer of the security has issued other rated securities the nature and provisions of the relevant security whether the obligations under the relevant security are guaranteed by another entity and the rating of such guarantor (if any) relevant cash flows macroeconomic analysis andor sector or industry analysis
SR-NASDAQ-2015-011 Amendment No 2 Page 41 of 64
Adviser to be of comparable quality) commonly referred to as ldquohigh yieldrdquo or ldquojunkrdquo
bonds If subsequent to purchase by the Fund a security held by the Fund experiences a
decline in credit quality and falls below investment grade the Fund may continue to hold
the security and it will not cause the Fund to violate the 35 investment limitation
however the security will be taken into account for purposes of determining whether
purchases of additional securities will cause the Fund to violate such limitation
The Fund will limit its investments in asset-backed securities (excluding agency
mortgage-backed securities) and non-agency mortgage-backed securities (in the
aggregate) to 20 of its net assets20 In addition the Fund will limit its investments in
junior loans to 20 of its net assets
The Fund will hold debt securities (including in the aggregate Floating Rate
Debt Instruments and the fixed-rate debt securities described below) of at least 13
non-affiliated issuers
Other Investments
Under normal market conditions the Fund will invest primarily in the Floating
Rate Debt Instruments described above to meet its investment objective In addition the
Fund may invest up to 20 of its net assets in the following types of fixed-rate debt
securities corporate21 and government bonds and notes agency securities22 instruments
20 For the avoidance of doubt there is no limitation on the Fundrsquos investments in agency mortgage-backed securities
21 See footnote 10 above
22 See footnote 11 above
SR-NASDAQ-2015-011 Amendment No 2 Page 42 of 64
of non-US issuers in developed markets privately-issued securities 23 asset-backed
securities 24 mortgage-backed securities 25 municipal bonds money market securities26
and investment companies27 (including investment companies advised by the Adviser)
that invest primarily in the foregoing types of debt securities
Further to pursue its investment objective the Fund may invest up to 20 of the
value of its net assets in exchange-listed options on US Treasury futures contracts and
exchange-listed US Treasury futures contracts28 The use of these derivative
transactions may allow the Fund to obtain net long or short exposures to selected interest
rates These derivatives may also be used to hedge risks including interest rate risks and
credit risks associated with the Fundrsquos portfolio investments The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
23 See footnote 12 above
24 See footnote 13 above
25 See footnote 14 above
26 ldquoMoney market securitiesrdquo for these purposes generally includes short-term high-quality obligations issued or guaranteed by the US Treasury or the agencies or instrumentalities of the US government short-term high-quality securities issued or guaranteed by non-US governments agencies and instrumentalities repurchase agreements commercial paper (both asset-backed and non-assetshybacked) and deposits and other obligations of US and non-US banks and financial institutions
27 See footnote 16 above
28 At least 90 of the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be invested in instruments that trade in markets that are members of the Intermarket Surveillance Group (ldquoISGrdquo) (see footnote 40 below) or are parties to a comprehensive surveillance sharing agreement with the Exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 43 of 64
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index
Investment Restrictions
The Fund will not invest 25 or more of the value of its total assets in securities
of issuers in any one industry This restriction does not apply to (a) obligations issued or
guaranteed by the US government its agencies or instrumentalities or (b) securities of
other investment companies29
The Fund may hold up to an aggregate amount of 15 of its net assets in illiquid
assets (calculated at the time of investment) including Rule 144A securities deemed
illiquid by the Adviser30 The Fund will monitor its portfolio liquidity on an ongoing
basis to determine whether in light of current circumstances an adequate level of
liquidity is being maintained and will consider taking appropriate steps in order to
maintain adequate liquidity if through a change in values net assets or other
circumstances more than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid
assets include securities subject to contractual or other restrictions on resale and other
29 See Form N-1A Item 9 The Commission has taken the position that a fund is concentrated if it invests more than 25 of the value of its total assets in any one industry See eg Investment Company Act Release No 9011 (October 30 1975) 40 FR 54241 (November 21 1975)
30 In reaching liquidity decisions the Adviser may consider the following factors the frequency of trades and quotes for the security the number of dealers wishing to purchase or sell the security and the number of other potential purchasers dealer undertakings to make a market in the security and the nature of the security and the nature of the marketplace in which it trades (eg the time needed to dispose of the security the method of soliciting offers and the mechanics of transfer)
SR-NASDAQ-2015-011 Amendment No 2 Page 44 of 64
instruments that lack readily available markets as determined in accordance with
Commission staff guidance31
The Fund will not invest in non-US equity securities
Creation and Redemption of Shares
The Fund will issue and redeem Shares on a continuous basis at net asset value
(ldquoNAVrdquo)32 only in large blocks of Shares (ldquoCreation Unitsrdquo) in transactions with
authorized participants generally including broker-dealers and large institutional
investors (ldquoAuthorized Participantsrdquo) Creation Units generally will consist of 50000
Shares although this may change from time to time Creation Units however are not
expected to consist of less than 50000 Shares As described in the Registration
Statement and consistent with the Exemptive Relief the Fund will issue and redeem
Creation Units in exchange for an in-kind portfolio of instruments andor cash in lieu of
31 The Commission has stated that long-standing Commission guidelines have required open-end funds to hold no more than 15 of their net assets in illiquid securities and other illiquid assets See Investment Company Act Release No 28193 (March 11 2008) 73 FR 14618 (March 18 2008) footnote 34 See also Investment Company Act Release No 5847 (October 21 1969) 35 FR 19989 (December 31 1970) (Statement Regarding ldquoRestricted Securitiesrdquo) Investment Company Act Release No 18612 (March 12 1992) 57 FR 9828 (March 20 1992) (Revisions of Guidelines to Form N-1A) A fundrsquos portfolio security is illiquid if it cannot be disposed of in the ordinary course of business within seven days at approximately the value ascribed to it by the fund See Investment Company Act Release No 14983 (March 12 1986) 51 FR 9773 (March 21 1986) (adopting amendments to Rule 2a-7 under the 1940 Act) Investment Company Act Release No 17452 (April 23 1990) 55 FR 17933 (April 30 1990) (adopting Rule 144A under the Securities Act of 1933)
32 The NAV of the Fundrsquos Shares generally will be calculated once daily Monday through Friday as of the close of regular trading on the New York Stock Exchange generally 400 pm Eastern Time (the ldquoNAV Calculation Timerdquo) NAV per Share will be calculated by dividing the Fundrsquos net assets by the number of Fund Shares outstanding For more information regarding the valuation of Fund investments in calculating the Fundrsquos NAV see the Registration Statement
SR-NASDAQ-2015-011 Amendment No 2 Page 45 of 64
such instruments (the ldquoCreation Basketrdquo) In addition if there is a difference between the
NAV attributable to a Creation Unit and the market value of the Creation Basket
exchanged for the Creation Unit the party conveying instruments with the lower value
will pay to the other an amount in cash equal to the difference (referred to as the ldquoCash
Componentrdquo)
Creations and redemptions must be made by or through an Authorized Participant
that has executed an agreement that has been agreed to by the Distributor and BNY with
respect to creations and redemptions of Creation Units All standard orders to create
Creation Units must be received by the transfer agent no later than the closing time of the
regular trading session on the New York Stock Exchange (ordinarily 400 pm Eastern
Time) (the ldquoClosing Timerdquo) in each case on the date such order is placed in order for the
creation of Creation Units to be effected based on the NAV of Shares as next determined
on such date after receipt of the order in proper form Shares may be redeemed only in
Creation Units at their NAV next determined after receipt not later than the Closing Time
of a redemption request in proper form by the Fund through the transfer agent and only
on a business day
The Fundrsquos custodian through the National Securities Clearing Corporation will
make available on each business day prior to the opening of business of the Exchange
the list of the names and quantities of the instruments comprising the Creation Basket as
well as the estimated Cash Component (if any) for that day The published Creation
Basket will apply until a new Creation Basket is announced on the following business
day prior to commencement of trading in the Shares
SR-NASDAQ-2015-011 Amendment No 2 Page 46 of 64
Net Asset Value
The Fundrsquos NAV will be determined as of the close of trading (normally
400 pm Eastern Time) on each day the New York Stock Exchange is open for
business NAV will be calculated for the Fund by taking the market price of the Fundrsquos
total assets including interest or dividends accrued but not yet collected less all
liabilities and dividing such amount by the total number of Shares outstanding The
result rounded to the nearest cent will be the NAV per Share All valuations will be
subject to review by the Board of Trustees of the Trust (ldquoTrust Boardrdquo) or its delegate
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with valuation procedures (which may be revised from time to time) adopted by the Trust
Board (the ldquoValuation Proceduresrdquo) and in accordance with the 1940 Act A market
valuation generally means a valuation (i) obtained from an exchange an independent
pricing service (ldquoPricing Servicerdquo) or a major market maker (or dealer) or (ii) based on a
price quotation or other equivalent indication of value supplied by an exchange a Pricing
Service or a major market maker (or dealer) The information summarized below is
based on the Valuation Procedures as currently in effect however as noted above the
Valuation Procedures are amended from time to time and therefore such information is
subject to change
Certain securities including Floating Rate Debt Instruments in which the Fund
may invest will not be listed on any securities exchange or board of trade Such
securities will typically be bought and sold by institutional investors in individually
negotiated private transactions that function in many respects like an over-the-counter
SR-NASDAQ-2015-011 Amendment No 2 Page 47 of 64
secondary market although typically no formal market makers will exist Certain
securities particularly debt securities will have few or no trades or trade infrequently
and information regarding a specific security may not be widely available or may be
incomplete Accordingly determinations of the fair value of debt securities may be
based on infrequent and dated information Because there is less reliable objective data
available elements of judgment may play a greater role in valuation of debt securities
than for other types of securities Typically Floating Rate Debt Instruments and other
debt securities in which the Fund may invest (other than those described below) will be
valued using information provided by a Pricing Service Debt securities having a
remaining maturity of 60 days or less when purchased will be valued at cost adjusted for
amortization of premiums and accretion of discounts provided the Adviserrsquos pricing
committee (the ldquoPricing Committeerdquo) has determined that the use of amortized cost is an
appropriate reflection of fair value given market and issuer-specific conditions existing at
the time of the determination Overnight repurchase agreements will be valued at cost
and term repurchase agreements (ie those whose maturity exceeds seven days) will be
valued at the average of the bid quotations obtained daily from at least two recognized
dealers
Asset-backed and mortgage-backed securities will generally be valued by using a
Pricing Service If a Pricing Service does not cover a particular asset-backed or
mortgage-backed security or discontinues covering a particular asset-backed or
mortgage-backed security the security will be priced using broker quotes generally
provided by brokers that make or participate in markets in the security To derive values
Pricing Services and broker-dealers may use matrix pricing and valuation models as well
SR-NASDAQ-2015-011 Amendment No 2 Page 48 of 64
as recent market transactions for the same or similar assets As it deems appropriate the
Pricing Committee may determine that a Pricing Service price does not represent an
accurate value of an asset-backed or mortgage-backed security based on broker quotes it
receives a recent trade in the security by the Fund information from a portfolio manager
or other market information In the event that the Pricing Committee determines that the
Pricing Service price is unreliable or inaccurate based on such other information broker
quotes may be used Additionally if the Pricing Committee determines that the price of
an asset-backed or mortgage-backed security obtained from a Pricing Service and
available broker quotes is unreliable or inaccurate due to market conditions or other
reasons or if a Pricing Service price or broker quote is unavailable the security will be
valued using fair value pricing as described below
Equity securities listed on any exchange other than the Exchange will be valued at
the last sale price on the exchange on which they are principally traded on the business
day as of which such value is being determined Equity securities listed on the Exchange
will be valued at the official closing price on the business day as of which such value is
being determined If there has been no sale on such day or no official closing price in
the case of securities traded on the Exchange the securities will be valued using fair
value pricing as described below Equity securities traded on more than one securities
exchange will be valued at the last sale price or official closing price as applicable on
the business day as of which such value is being determined at the close of the exchange
representing the principal market for such securities
Exchange-traded options and futures contracts will be valued at the closing price
in the market where such contracts are principally traded
SR-NASDAQ-2015-011 Amendment No 2 Page 49 of 64
Certain securities including Floating Rate Debt Instruments in which the Fund
will invest will not be able to be priced by pre-established pricing methods Such
securities may be valued by the Trust Board or its delegate at fair value The use of fair
value pricing by the Fund will be governed by the Valuation Procedures and conducted in
accordance with the provisions of the 1940 Act Valuing the Fundrsquos securities using fair
value pricing will result in using prices for those securities that may differ from current
market valuations or official closing prices on the applicable exchange
Availability of Information
The Fundrsquos website (wwwftportfolioscom) which will be publicly available
prior to the public offering of Shares will include a form of the prospectus for the Fund
that may be downloaded The website will include the Sharesrsquo ticker CUSIP and
exchange information along with additional quantitative information updated on a daily
basis including for the Fund (1) daily trading volume the prior business dayrsquos reported
NAV and closing price mid-point of the bidask spread at the time of calculation of such
NAV (the ldquoBidAsk Pricerdquo)33 and a calculation of the premium and discount of the
BidAsk Price against the NAV and (2) data in chart format displaying the frequency
distribution of discounts and premiums of the daily BidAsk Price against the NAV
within appropriate ranges for each of the four previous calendar quarters On each
business day before commencement of trading in Shares in the Regular Market Session34
33 The BidAsk Price of the Fund will be determined using the mid-point of the highest bid and the lowest offer on the Exchange as of the time of calculation of the Fundrsquos NAV The records relating to BidAsk Prices will be retained by the Fund and its service providers
34 See Nasdaq Rule 4120(b)(4) (describing the three trading sessions on the Exchange (1) Pre-Market Session from 4 am to 930 am Eastern Time (2)
SR-NASDAQ-2015-011 Amendment No 2 Page 50 of 64
on the Exchange the Fund will disclose on its website the identities and quantities of the
portfolio of securities and other assets (the ldquoDisclosed Portfoliordquo as defined in Nasdaq
Rule 5735(c)(2)) held by the Fund that will form the basis for the Fundrsquos calculation of
NAV at the end of the business day 35 The Fundrsquos disclosure of derivative positions in
the Disclosed Portfolio will include information that market participants can use to value
these positions intraday On a daily basis the Fund will disclose on the Fundrsquos website
the following information regarding each portfolio holding as applicable to the type of
holding ticker symbol CUSIP number or other identifier if any a description of the
holding (including the type of holding) the identity of the security or other asset or
instrument underlying the holding if any for options the option strike price quantity
held (as measured by for example par value notional value or number of shares
contracts or units) maturity date if any coupon rate if any effective date if any market
value of the holding and percentage weighting of the holding in the Fundrsquos portfolio
The website information will be publicly available at no charge
In addition for the Fund an estimated value defined in Rule 5735(c)(3) as the
ldquoIntraday Indicative Valuerdquo that reflects an estimated intraday value of the Fundrsquos
Disclosed Portfolio will be disseminated Moreover the Intraday Indicative Value
Regular Market Session from 930 am to 4 pm or 415 pm Eastern Time and (3) Post-Market Session from 4 pm or 415 pm to 8 pm Eastern Time)
Under accounting procedures to be followed by the Fund trades made on the prior business day (ldquoTrdquo) will be booked and reflected in NAV on the current business day (ldquoT+1rdquo) Accordingly the Fund will be able to disclose at the beginning of the business day the portfolio that will form the basis for the NAV calculation at the end of the business day
35
SR-NASDAQ-2015-011 Amendment No 2 Page 51 of 64
available on the NASDAQ OMX Information LLC proprietary index data service36 will
be based upon the current value for the components of the Disclosed Portfolio and will be
updated and widely disseminated by one or more major market data vendors and broadly
displayed at least every 15 seconds during the Regular Market Session The Intraday
Indicative Value will be based on quotes and closing prices from the securitiesrsquo local
market and may not reflect events that occur subsequent to the local marketrsquos close
Premiums and discounts between the Intraday Indicative Value and the market price may
occur This should not be viewed as a ldquoreal timerdquo update of the NAV per Share of the
Fund which is calculated only once a day
The dissemination of the Intraday Indicative Value together with the Disclosed
Portfolio will allow investors to determine the value of the underlying portfolio of the
Fund on a daily basis and will provide a close estimate of that value throughout the
trading day
Investors will also be able to obtain the Fundrsquos Statement of Additional
Information (ldquoSAIrdquo) the Fundrsquos annual and semi-annual reports (together ldquoShareholder
Reportsrdquo) and its Form N-CSR and Form N-SAR filed twice a year The Fundrsquos SAI
and Shareholder Reports will be available free upon request from the Fund and those
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or
downloaded from the Commissionrsquos website at wwwsecgov Information regarding
Currently the NASDAQ OMX Global Index Data Service (ldquoGIDSrdquo) is the NASDAQ OMX global index data feed service offering real-time updates daily summary messages and access to widely followed indexes and Intraday Indicative Values for ETFs GIDS provides investment professionals with the daily information needed to track or trade NASDAQ OMX indexes listed ETFs or third-party partner indexes and ETFs
36
SR-NASDAQ-2015-011 Amendment No 2 Page 52 of 64
market price and trading volume of the Shares will be continually available on a real-time
basis throughout the day on brokersrsquo computer screens and other electronic services
Information regarding the previous dayrsquos closing price and trading volume information
for the Shares will be published daily in the financial section of newspapers Quotation
and last sale information for the Shares will be available via Nasdaq proprietary quote
and trade services as well as in accordance with the Unlisted Trading Privileges and the
Consolidated Tape Association (ldquoCTArdquo) plans for the Shares Quotation and last sale
information for the other ETFs in which the Fund will invest will be available via the
quote and trade services of their respective primary exchanges as well as in accordance
with the Unlisted Trading Privileges and the CTA plans as applicable Quotation and
last sale information for US exchange-traded options will be available via the Options
Price Reporting Authority Intraday executable price quotations on Floating Rate Debt
Instruments and other assets not traded on an exchange will be available from major
broker-dealer firms or market data vendors as well as from automated quotation systems
published or other public sources or online information services Additionally the Trade
Reporting and Compliance Engine (ldquoTRACErdquo) of the Financial Industry Regulatory
Authority (ldquoFINRArdquo) will be a source of price information for corporate bonds
privately-issued securities mortgage-backed securities and asset-backed securities to the
extent transactions in such securities are reported to TRACE37 For exchange-traded
Broker-dealers that are FINRA member firms have an obligation to report transactions in specified debt securities to TRACE to the extent required under applicable FINRA rules Generally such debt securities will have at issuance a maturity that exceeds one calendar year
37
SR-NASDAQ-2015-011 Amendment No 2 Page 53 of 64
assets intraday pricing information will be available directly from the applicable listing
exchange
Additional information regarding the Fund and the Shares including investment
strategies risks creation and redemption procedures fees Fund holdings disclosure
policies distributions and taxes will be included in the Registration Statement
Initial and Continued Listing
The Shares will be subject to Rule 5735 which sets forth the initial and continued
listing criteria applicable to Managed Fund Shares The Exchange represents that for
initial andor continued listing the Fund must be in compliance with Rule 10A-338 under
the Act A minimum of 100000 Shares will be outstanding at the commencement of
trading on the Exchange The Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the NAV and the
Disclosed Portfolio will be made available to all market participants at the same time
Trading Halts
With respect to trading halts the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading in the Shares of the Fund Nasdaq will
halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12) Trading may be
halted because of market conditions or for reasons that in the view of the Exchange
make trading in the Shares inadvisable These may include (1) the extent to which
trading is not occurring in the securities andor the other assets constituting the Disclosed
Portfolio of the Fund or (2) whether other unusual conditions or circumstances
See 17 CFR 24010A-3 38
SR-NASDAQ-2015-011 Amendment No 2 Page 54 of 64
detrimental to the maintenance of a fair and orderly market are present Trading in the
Shares also will be subject to Rule 5735(d)(2)(D) which sets forth circumstances under
which Shares of the Fund may be halted
Trading Rules
Nasdaq deems the Shares to be equity securities thus rendering trading in the
Shares subject to Nasdaqrsquos existing rules governing the trading of equity securities
Nasdaq will allow trading in the Shares from 400 am until 800 pm Eastern Time
The Exchange has appropriate rules to facilitate transactions in the Shares during all
trading sessions As provided in Nasdaq Rule 5735(b)(3) the minimum price variation
for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $001
Surveillance
The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws39 The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities laws
The surveillances referred to above generally focus on detecting securities trading
outside their normal patterns which could be indicative of manipulative or other violative
activity When such situations are detected surveillance analysis follows and
FINRA surveils trading on the Exchange pursuant to a regulatory services agreement The Exchange is responsible for FINRArsquos performance under this regulatory services agreement
39
SR-NASDAQ-2015-011 Amendment No 2 Page 55 of 64
investigations are opened where appropriate to review the behavior of all relevant
parties for all relevant trading violations
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 56 of 64
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
SR-NASDAQ-2015-011 Amendment No 2 Page 57 of 64
2 Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
SR-NASDAQ-2015-011 Amendment No 2 Page 58 of 64
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
SR-NASDAQ-2015-011 Amendment No 2 Page 59 of 64
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
SR-NASDAQ-2015-011 Amendment No 2 Page 60 of 64
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 61 of 64
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
SR-NASDAQ-2015-011 Amendment No 2 Page 62 of 64
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
B Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
C Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received From Members Participants or Others
Written comments were neither solicited nor received
III Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Within 45 days of the date of publication of this notice in the Federal Register or
within such longer period (i) as the Commission may designate up to 90 days of such date
if it finds such longer period to be appropriate and publishes its reasons for so finding or
(ii) as to which the Exchange consents the Commission shall (a) by order approve or
disapprove such proposed rule change or (b) institute proceedings to determine whether
the proposed rule change should be disapproved
SR-NASDAQ-2015-011 Amendment No 2 Page 63 of 64
IV Solicitation of Comments
Interested persons are invited to submit written data views and arguments
concerning the foregoing including whether the proposed rule change is consistent with
the Act Comments may be submitted by any of the following methods
Electronic comments
bull Use the Commissionrsquos Internet comment form
(httpwwwsecgovrulessroshtml) or
bull Send an e-mail to rule-commentssecgov Please include File Number
SR-NASDAQ-2015-011 on the subject line
Paper comments
bull Send paper comments in triplicate to Brent J Fields Secretary Securities and
Exchange Commission Station Place 100 F Street NE Washington DC
20549-9303
All submissions should refer to File Number SR-NASDAQ-2015-011 This file number
should be included on the subject line if e-mail is used To help the Commission process
and review your comments more efficiently please use only one method The
Commission will post all comments on the Commissionrsquos Internet website
httpwwwsecgovrulessroshtml
Copies of the submission all subsequent amendments all written statements with
respect to the proposed rule change that are filed with the Commission and all written
communications relating to the proposed rule change between the Commission and any
person other than those that may be withheld from the public in accordance with the
provisions of 5 USC 552 will be available for website viewing and printing in the
Commissionrsquos Public Reference Room 100 F Street NE Washington DC 20549 on
SR-NASDAQ-2015-011 Amendment No 2 Page 64 of 64
official business days between the hours of 1000 am and 300 pm Copies of the filing
also will be available for inspection and copying at the principal office of Nasdaq All
comments received will be posted without change the Commission does not edit
personal identifying information from submissions You should submit only information
that you wish to make available publicly
All submissions should refer to File Number SR-NASDAQ-2015-011 and should
be submitted on or before [insert date 21 days from publication in the Federal Register]
For the Commission by the Division of Trading and Markets pursuant to
delegated authority41
Kevin M OrsquoNeill Deputy Secretary
17 CFR 20030-3(a)(12) 41
SR-NASDAQ-2015-011 Amendment No 2 Page 9 of 64
invest primarily in the foregoing types of debt instruments17 (collectively ldquoFloating Rate
Debt Instrumentsrdquo)
At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade To be considered
ldquoinvestment graderdquo under normal market conditions rated Floating Rate Debt
Instruments will carry at the time of purchase a rating in the highest four rating
categories of at least one nationally recognized statistical ratings organization
(ldquoNRSROrdquo) (eg BBB- or higher by Standard amp Poorrsquos Ratings Services (ldquoSampPrdquo)
andor Fitch Ratings (ldquoFitchrdquo) or Baa3 or higher by Moodyrsquos Investors Service Inc
(ldquoMoodyrsquosrdquo)18 For unrated securities to be considered ldquoinvestment graderdquo under normal
market conditions such securities will be determined at the time of purchase to be of
comparable quality19 by the Adviser The Fund may invest up to 35 of its net assets in
(February 5 2013) (File No 812-13895) The ETFs in which the Fund may invest include Index Fund Shares (as described in Nasdaq Rule 5705) Portfolio Depository Receipts (as described in Nasdaq Rule 5705) and Managed Fund Shares (as described in Nasdaq Rule 5735) While the Fund may invest in inverse ETFs the Fund will not invest in leveraged or inverse leveraged (eg 2X or -3X) ETFs
17 The liquidity of a security especially in the case of asset-backed and mortgage-backed securities will be a substantial factor in the Fundrsquos security selection process Consistent with the discussion below under ldquoInvestment Restrictionsrdquo the Fund will not purchase any Floating Rate Debt Instruments (including asset-backed securities and mortgage-backed securities) that in the Adviserrsquos opinion are illiquid if as a result more than 15 of the value of the Fundrsquos net assets will be invested in illiquid assets
18 For the avoidance of doubt if a security is rated by multiple NRSROs and receives different ratings the Fund will treat the security as being rated in the highest rating category received from an NRSRO
19 Comparable quality of unrated securities will be determined by the Adviser based on fundamental credit analysis of the unrated security and comparable NRSRO-rated securities On a best efforts basis the Adviser will attempt to make a rating
SR-NASDAQ-2015-011 Amendment No 2 Page 10 of 64
securities that are at the time of investment rated below investment grade by each
NRSRO rating such securities (or securities that are unrated and determined by the
Adviser to be of comparable quality) commonly referred to as ldquohigh yieldrdquo or ldquojunkrdquo
bonds If subsequent to purchase by the Fund a security held by the Fund experiences a
decline in credit quality and falls below investment grade the Fund may continue to hold
the security and it will not cause the Fund to violate the 35 investment limitation
however the security will be taken into account for purposes of determining whether
purchases of additional securities will cause the Fund to violate such limitation
The Fund will limit its investments in asset-backed securities (excluding agency
mortgage-backed securities) and non-agency mortgage-backed securities (in the
aggregate) to 20 of its net assets20 In addition the Fund will limit its investments in
junior loans to 20 of its net assets
The Fund will hold debt securities (including in the aggregate Floating Rate
Debt Instruments and the fixed-rate debt securities described below) of at least 13
non-affiliated issuers
Other Investments
Under normal market conditions the Fund will invest primarily in the Floating
Rate Debt Instruments described above to meet its investment objective In addition the
determination based on publicly available data In making a ldquocomparable qualityrdquo determination the Adviser may consider for example whether the issuer of the security has issued other rated securities the nature and provisions of the relevant security whether the obligations under the relevant security are guaranteed by another entity and the rating of such guarantor (if any) relevant cash flows macroeconomic analysis andor sector or industry analysis
For the avoidance of doubt there is no limitation on the Fundrsquos investments in agency mortgage-backed securities
20
SR-NASDAQ-2015-011 Amendment No 2 Page 11 of 64
Fund may invest up to 20 of its net assets in the following types of fixed-rate debt
securities corporate21 and government bonds and notes agency securities22 instruments
of non-US issuers in developed markets privately-issued securities 23 asset-backed
securities 24 mortgage-backed securities 25 municipal bonds money market securities26
and investment companies27 (including investment companies advised by the Adviser)
that invest primarily in the foregoing types of debt securities
Further to pursue its investment objective the Fund may invest up to 20 of the
value of its net assets in exchange-listed options on US Treasury futures contracts and
exchange-listed US Treasury futures contracts28 The use of these derivative
transactions may allow the Fund to obtain net long or short exposures to selected interest
rates These derivatives may also be used to hedge risks including interest rate risks and
21 See footnote 10 above
22 See footnote 11 above
23 See footnote 12 above
24 See footnote 13 above
25 See footnote 14 above
26 ldquoMoney market securitiesrdquo for these purposes generally includes short-term high-quality obligations issued or guaranteed by the US Treasury or the agencies or instrumentalities of the US government short-term high-quality securities issued or guaranteed by non-US governments agencies and instrumentalities repurchase agreements commercial paper (both asset-backed and non-assetshybacked) and deposits and other obligations of US and non-US banks and financial institutions
27 See footnote 16 above
28 At least 90 of the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be invested in instruments that trade in markets that are members of the Intermarket Surveillance Group (ldquoISGrdquo) (see footnote 40 below) or are parties to a comprehensive surveillance sharing agreement with the Exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 12 of 64
credit risks associated with the Fundrsquos portfolio investments The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index
Investment Restrictions
The Fund will not invest 25 or more of the value of its total assets in securities
of issuers in any one industry This restriction does not apply to (a) obligations issued or
guaranteed by the US government its agencies or instrumentalities or (b) securities of
other investment companies29
The Fund may hold up to an aggregate amount of 15 of its net assets in illiquid
assets (calculated at the time of investment) including Rule 144A securities deemed
illiquid by the Adviser30 The Fund will monitor its portfolio liquidity on an ongoing
basis to determine whether in light of current circumstances an adequate level of
liquidity is being maintained and will consider taking appropriate steps in order to
maintain adequate liquidity if through a change in values net assets or other
circumstances more than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid
assets include securities subject to contractual or other restrictions on resale and other
29 See Form N-1A Item 9 The Commission has taken the position that a fund is concentrated if it invests more than 25 of the value of its total assets in any one industry See eg Investment Company Act Release No 9011 (October 30 1975) 40 FR 54241 (November 21 1975)
30 In reaching liquidity decisions the Adviser may consider the following factors the frequency of trades and quotes for the security the number of dealers wishing to purchase or sell the security and the number of other potential purchasers dealer undertakings to make a market in the security and the nature of the security and the nature of the marketplace in which it trades (eg the time needed to dispose of the security the method of soliciting offers and the mechanics of transfer)
SR-NASDAQ-2015-011 Amendment No 2 Page 13 of 64
instruments that lack readily available markets as determined in accordance with
Commission staff guidance31
The Fund will not invest in non-US equity securities
Creation and Redemption of Shares
The Fund will issue and redeem Shares on a continuous basis at net asset value
(ldquoNAVrdquo)32 only in large blocks of Shares (ldquoCreation Unitsrdquo) in transactions with
authorized participants generally including broker-dealers and large institutional
investors (ldquoAuthorized Participantsrdquo) Creation Units generally will consist of 50000
Shares although this may change from time to time Creation Units however are not
expected to consist of less than 50000 Shares As described in the Registration
Statement and consistent with the Exemptive Relief the Fund will issue and redeem
Creation Units in exchange for an in-kind portfolio of instruments andor cash in lieu of
31 The Commission has stated that long-standing Commission guidelines have required open-end funds to hold no more than 15 of their net assets in illiquid securities and other illiquid assets See Investment Company Act Release No 28193 (March 11 2008) 73 FR 14618 (March 18 2008) footnote 34 See also Investment Company Act Release No 5847 (October 21 1969) 35 FR 19989 (December 31 1970) (Statement Regarding ldquoRestricted Securitiesrdquo) Investment Company Act Release No 18612 (March 12 1992) 57 FR 9828 (March 20 1992) (Revisions of Guidelines to Form N-1A) A fundrsquos portfolio security is illiquid if it cannot be disposed of in the ordinary course of business within seven days at approximately the value ascribed to it by the fund See Investment Company Act Release No 14983 (March 12 1986) 51 FR 9773 (March 21 1986) (adopting amendments to Rule 2a-7 under the 1940 Act) Investment Company Act Release No 17452 (April 23 1990) 55 FR 17933 (April 30 1990) (adopting Rule 144A under the Securities Act of 1933)
32 The NAV of the Fundrsquos Shares generally will be calculated once daily Monday through Friday as of the close of regular trading on the New York Stock Exchange generally 400 pm Eastern Time (the ldquoNAV Calculation Timerdquo) NAV per Share will be calculated by dividing the Fundrsquos net assets by the number of Fund Shares outstanding For more information regarding the valuation of Fund investments in calculating the Fundrsquos NAV see the Registration Statement
SR-NASDAQ-2015-011 Amendment No 2 Page 14 of 64
such instruments (the ldquoCreation Basketrdquo) In addition if there is a difference between the
NAV attributable to a Creation Unit and the market value of the Creation Basket
exchanged for the Creation Unit the party conveying instruments with the lower value
will pay to the other an amount in cash equal to the difference (referred to as the ldquoCash
Componentrdquo)
Creations and redemptions must be made by or through an Authorized Participant
that has executed an agreement that has been agreed to by the Distributor and BNY with
respect to creations and redemptions of Creation Units All standard orders to create
Creation Units must be received by the transfer agent no later than the closing time of the
regular trading session on the New York Stock Exchange (ordinarily 400 pm Eastern
Time) (the ldquoClosing Timerdquo) in each case on the date such order is placed in order for the
creation of Creation Units to be effected based on the NAV of Shares as next determined
on such date after receipt of the order in proper form Shares may be redeemed only in
Creation Units at their NAV next determined after receipt not later than the Closing Time
of a redemption request in proper form by the Fund through the transfer agent and only
on a business day
The Fundrsquos custodian through the National Securities Clearing Corporation will
make available on each business day prior to the opening of business of the Exchange
the list of the names and quantities of the instruments comprising the Creation Basket as
well as the estimated Cash Component (if any) for that day The published Creation
Basket will apply until a new Creation Basket is announced on the following business
day prior to commencement of trading in the Shares
SR-NASDAQ-2015-011 Amendment No 2 Page 15 of 64
Net Asset Value
The Fundrsquos NAV will be determined as of the close of trading (normally
400 pm Eastern Time) on each day the New York Stock Exchange is open for
business NAV will be calculated for the Fund by taking the market price of the Fundrsquos
total assets including interest or dividends accrued but not yet collected less all
liabilities and dividing such amount by the total number of Shares outstanding The
result rounded to the nearest cent will be the NAV per Share All valuations will be
subject to review by the Board of Trustees of the Trust (ldquoTrust Boardrdquo) or its delegate
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with valuation procedures (which may be revised from time to time) adopted by the Trust
Board (the ldquoValuation Proceduresrdquo) and in accordance with the 1940 Act A market
valuation generally means a valuation (i) obtained from an exchange an independent
pricing service (ldquoPricing Servicerdquo) or a major market maker (or dealer) or (ii) based on a
price quotation or other equivalent indication of value supplied by an exchange a Pricing
Service or a major market maker (or dealer) The information summarized below is
based on the Valuation Procedures as currently in effect however as noted above the
Valuation Procedures are amended from time to time and therefore such information is
subject to change
Certain securities including Floating Rate Debt Instruments in which the Fund
may invest will not be listed on any securities exchange or board of trade Such
securities will typically be bought and sold by institutional investors in individually
negotiated private transactions that function in many respects like an over-the-counter
SR-NASDAQ-2015-011 Amendment No 2 Page 16 of 64
secondary market although typically no formal market makers will exist Certain
securities particularly debt securities will have few or no trades or trade infrequently
and information regarding a specific security may not be widely available or may be
incomplete Accordingly determinations of the fair value of debt securities may be
based on infrequent and dated information Because there is less reliable objective data
available elements of judgment may play a greater role in valuation of debt securities
than for other types of securities Typically Floating Rate Debt Instruments and other
debt securities in which the Fund may invest (other than those described below) will be
valued using information provided by a Pricing Service Debt securities having a
remaining maturity of 60 days or less when purchased will be valued at cost adjusted for
amortization of premiums and accretion of discounts provided the Adviserrsquos pricing
committee (the ldquoPricing Committeerdquo) has determined that the use of amortized cost is an
appropriate reflection of fair value given market and issuer-specific conditions existing at
the time of the determination Overnight repurchase agreements will be valued at cost
and term repurchase agreements (ie those whose maturity exceeds seven days) will be
valued at the average of the bid quotations obtained daily from at least two recognized
dealers
Asset-backed and mortgage-backed securities will generally be valued by using a
Pricing Service If a Pricing Service does not cover a particular asset-backed or
mortgage-backed security or discontinues covering a particular asset-backed or
mortgage-backed security the security will be priced using broker quotes generally
provided by brokers that make or participate in markets in the security To derive values
Pricing Services and broker-dealers may use matrix pricing and valuation models as well
SR-NASDAQ-2015-011 Amendment No 2 Page 17 of 64
as recent market transactions for the same or similar assets As it deems appropriate the
Pricing Committee may determine that a Pricing Service price does not represent an
accurate value of an asset-backed or mortgage-backed security based on broker quotes it
receives a recent trade in the security by the Fund information from a portfolio manager
or other market information In the event that the Pricing Committee determines that the
Pricing Service price is unreliable or inaccurate based on such other information broker
quotes may be used Additionally if the Pricing Committee determines that the price of
an asset-backed or mortgage-backed security obtained from a Pricing Service and
available broker quotes is unreliable or inaccurate due to market conditions or other
reasons or if a Pricing Service price or broker quote is unavailable the security will be
valued using fair value pricing as described below
Equity securities listed on any exchange other than the Exchange will be valued at
the last sale price on the exchange on which they are principally traded on the business
day as of which such value is being determined Equity securities listed on the Exchange
will be valued at the official closing price on the business day as of which such value is
being determined If there has been no sale on such day or no official closing price in
the case of securities traded on the Exchange the securities will be valued using fair
value pricing as described below Equity securities traded on more than one securities
exchange will be valued at the last sale price or official closing price as applicable on
the business day as of which such value is being determined at the close of the exchange
representing the principal market for such securities
Exchange-traded options and futures contracts will be valued at the closing price
in the market where such contracts are principally traded
SR-NASDAQ-2015-011 Amendment No 2 Page 18 of 64
Certain securities including Floating Rate Debt Instruments in which the Fund
will invest will not be able to be priced by pre-established pricing methods Such
securities may be valued by the Trust Board or its delegate at fair value The use of fair
value pricing by the Fund will be governed by the Valuation Procedures and conducted in
accordance with the provisions of the 1940 Act Valuing the Fundrsquos securities using fair
value pricing will result in using prices for those securities that may differ from current
market valuations or official closing prices on the applicable exchange
Availability of Information
The Fundrsquos website (wwwftportfolioscom) which will be publicly available
prior to the public offering of Shares will include a form of the prospectus for the Fund
that may be downloaded The website will include the Sharesrsquo ticker CUSIP and
exchange information along with additional quantitative information updated on a daily
basis including for the Fund (1) daily trading volume the prior business dayrsquos reported
NAV and closing price mid-point of the bidask spread at the time of calculation of such
NAV (the ldquoBidAsk Pricerdquo)33 and a calculation of the premium and discount of the
BidAsk Price against the NAV and (2) data in chart format displaying the frequency
distribution of discounts and premiums of the daily BidAsk Price against the NAV
within appropriate ranges for each of the four previous calendar quarters On each
business day before commencement of trading in Shares in the Regular Market Session34
33 The BidAsk Price of the Fund will be determined using the mid-point of the highest bid and the lowest offer on the Exchange as of the time of calculation of the Fundrsquos NAV The records relating to BidAsk Prices will be retained by the Fund and its service providers
34 See Nasdaq Rule 4120(b)(4) (describing the three trading sessions on the Exchange (1) Pre-Market Session from 4 am to 930 am Eastern Time (2)
SR-NASDAQ-2015-011 Amendment No 2 Page 19 of 64
on the Exchange the Fund will disclose on its website the identities and quantities of the
portfolio of securities and other assets (the ldquoDisclosed Portfoliordquo as defined in Nasdaq
Rule 5735(c)(2)) held by the Fund that will form the basis for the Fundrsquos calculation of
NAV at the end of the business day 35 The Fundrsquos disclosure of derivative positions in
the Disclosed Portfolio will include information that market participants can use to value
these positions intraday On a daily basis the Fund will disclose on the Fundrsquos website
the following information regarding each portfolio holding as applicable to the type of
holding ticker symbol CUSIP number or other identifier if any a description of the
holding (including the type of holding) the identity of the security or other asset or
instrument underlying the holding if any for options the option strike price quantity
held (as measured by for example par value notional value or number of shares
contracts or units) maturity date if any coupon rate if any effective date if any market
value of the holding and percentage weighting of the holding in the Fundrsquos portfolio
The website information will be publicly available at no charge
In addition for the Fund an estimated value defined in Rule 5735(c)(3) as the
ldquoIntraday Indicative Valuerdquo that reflects an estimated intraday value of the Fundrsquos
Disclosed Portfolio will be disseminated Moreover the Intraday Indicative Value
Regular Market Session from 930 am to 4 pm or 415 pm Eastern Time and (3) Post-Market Session from 4 pm or 415 pm to 8 pm Eastern Time)
Under accounting procedures to be followed by the Fund trades made on the prior business day (ldquoTrdquo) will be booked and reflected in NAV on the current business day (ldquoT+1rdquo) Accordingly the Fund will be able to disclose at the beginning of the business day the portfolio that will form the basis for the NAV calculation at the end of the business day
35
SR-NASDAQ-2015-011 Amendment No 2 Page 20 of 64
available on the NASDAQ OMX Information LLC proprietary index data service36 will
be based upon the current value for the components of the Disclosed Portfolio and will be
updated and widely disseminated by one or more major market data vendors and broadly
displayed at least every 15 seconds during the Regular Market Session The Intraday
Indicative Value will be based on quotes and closing prices from the securitiesrsquo local
market and may not reflect events that occur subsequent to the local marketrsquos close
Premiums and discounts between the Intraday Indicative Value and the market price may
occur This should not be viewed as a ldquoreal timerdquo update of the NAV per Share of the
Fund which is calculated only once a day
The dissemination of the Intraday Indicative Value together with the Disclosed
Portfolio will allow investors to determine the value of the underlying portfolio of the
Fund on a daily basis and will provide a close estimate of that value throughout the
trading day
Investors will also be able to obtain the Fundrsquos Statement of Additional
Information (ldquoSAIrdquo) the Fundrsquos annual and semi-annual reports (together ldquoShareholder
Reportsrdquo) and its Form N-CSR and Form N-SAR filed twice a year The Fundrsquos SAI
and Shareholder Reports will be available free upon request from the Fund and those
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or
downloaded from the Commissionrsquos website at wwwsecgov Information regarding
market price and trading volume of the Shares will be continually available on a real-time
Currently the NASDAQ OMX Global Index Data Service (ldquoGIDSrdquo) is the NASDAQ OMX global index data feed service offering real-time updates daily summary messages and access to widely followed indexes and Intraday Indicative Values for ETFs GIDS provides investment professionals with the daily information needed to track or trade NASDAQ OMX indexes listed ETFs or third-party partner indexes and ETFs
36
SR-NASDAQ-2015-011 Amendment No 2 Page 21 of 64
basis throughout the day on brokersrsquo computer screens and other electronic services
Information regarding the previous dayrsquos closing price and trading volume information
for the Shares will be published daily in the financial section of newspapers Quotation
and last sale information for the Shares will be available via Nasdaq proprietary quote
and trade services as well as in accordance with the Unlisted Trading Privileges and the
Consolidated Tape Association (ldquoCTArdquo) plans for the Shares Quotation and last sale
information for the other ETFs in which the Fund will invest will be available via the
quote and trade services of their respective primary exchanges as well as in accordance
with the Unlisted Trading Privileges and the CTA plans as applicable Quotation and
last sale information for US exchange-traded options will be available via the Options
Price Reporting Authority Intraday executable price quotations on Floating Rate Debt
Instruments and other assets not traded on an exchange will be available from major
broker-dealer firms or market data vendors as well as from automated quotation systems
published or other public sources or online information services Additionally the Trade
Reporting and Compliance Engine (ldquoTRACErdquo) of the Financial Industry Regulatory
Authority (ldquoFINRArdquo) will be a source of price information for corporate bonds
privately-issued securities mortgage-backed securities and asset-backed securities to the
extent transactions in such securities are reported to TRACE37 For exchange-traded
assets intraday pricing information will be available directly from the applicable listing
exchange
Broker-dealers that are FINRA member firms have an obligation to report transactions in specified debt securities to TRACE to the extent required under applicable FINRA rules Generally such debt securities will have at issuance a maturity that exceeds one calendar year
37
SR-NASDAQ-2015-011 Amendment No 2 Page 22 of 64
Additional information regarding the Fund and the Shares including investment
strategies risks creation and redemption procedures fees Fund holdings disclosure
policies distributions and taxes will be included in the Registration Statement
Initial and Continued Listing
The Shares will be subject to Rule 5735 which sets forth the initial and continued
listing criteria applicable to Managed Fund Shares The Exchange represents that for
initial andor continued listing the Fund must be in compliance with Rule 10A-338 under
the Act A minimum of 100000 Shares will be outstanding at the commencement of
trading on the Exchange The Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the NAV and the
Disclosed Portfolio will be made available to all market participants at the same time
Trading Halts
With respect to trading halts the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading in the Shares of the Fund Nasdaq will
halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12) Trading may be
halted because of market conditions or for reasons that in the view of the Exchange
make trading in the Shares inadvisable These may include (1) the extent to which
trading is not occurring in the securities andor the other assets constituting the Disclosed
Portfolio of the Fund or (2) whether other unusual conditions or circumstances
detrimental to the maintenance of a fair and orderly market are present Trading in the
See 17 CFR 24010A-3 38
SR-NASDAQ-2015-011 Amendment No 2 Page 23 of 64
Shares also will be subject to Rule 5735(d)(2)(D) which sets forth circumstances under
which Shares of the Fund may be halted
Trading Rules
Nasdaq deems the Shares to be equity securities thus rendering trading in the
Shares subject to Nasdaqrsquos existing rules governing the trading of equity securities
Nasdaq will allow trading in the Shares from 400 am until 800 pm Eastern Time
The Exchange has appropriate rules to facilitate transactions in the Shares during all
trading sessions As provided in Nasdaq Rule 5735(b)(3) the minimum price variation
for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $001
Surveillance
The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws39 The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities laws
The surveillances referred to above generally focus on detecting securities trading
outside their normal patterns which could be indicative of manipulative or other violative
activity When such situations are detected surveillance analysis follows and
investigations are opened where appropriate to review the behavior of all relevant
parties for all relevant trading violations
FINRA surveils trading on the Exchange pursuant to a regulatory services agreement The Exchange is responsible for FINRArsquos performance under this regulatory services agreement
39
SR-NASDAQ-2015-011 Amendment No 2 Page 24 of 64
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 25 of 64
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
b Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
SR-NASDAQ-2015-011 Amendment No 2 Page 26 of 64
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
SR-NASDAQ-2015-011 Amendment No 2 Page 27 of 64
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
SR-NASDAQ-2015-011 Amendment No 2 Page 28 of 64
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
SR-NASDAQ-2015-011 Amendment No 2 Page 29 of 64
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
SR-NASDAQ-2015-011 Amendment No 2 Page 30 of 64
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
SR-NASDAQ-2015-011 Amendment No 2 Page 31 of 64
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
4 Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
5 Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received from Members Participants or Others
Written comments were neither solicited nor received
6 Extension of Time Period for Commission Action
The Exchange does not consent at this time to an extension of any time period for
Commission action
7 Basis for Summary Effectiveness Pursuant to Section 19(b)(3) or for Accelerated Effectiveness Pursuant to Section 19(b)(2)
Not applicable
8 Proposed Rule Change Based on Rules of Another Self-Regulatory Organization or of the Commission
Not applicable
9 Security-Based Swap Submissions Filed Pursuant to Section 3C of the Act
Not applicable
SR-NASDAQ-2015-011 Amendment No 2 Page 32 of 64
10 Advance Notices Filed Pursuant to Section 806(e) of the Payment Clearing and Settlement Supervision Act
Not applicable
11 Exhibits
1 Completed notice of proposed rule change for publication in the Federal
Register
SR-NASDAQ-2015-011 Amendment No 2 Page 33 of 64
EXHIBIT 1
SECURITIES AND EXCHANGE COMMISSION (Release No 34shy File No SR-NASDAQ-2015-011)
April __ 2015
Self-Regulatory Organizations The NASDAQ Stock Market LLC Notice of Filing of Proposed Rule Change Relating to the Listing and Trading of the Shares of the First Trust Strategic Floating Rate ETF of First Trust Exchange-Traded Fund IV
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (ldquoActrdquo)1 and
Rule 19b-4 thereunder2 notice is hereby given that on February 12 2015 The NASDAQ
Stock Market LLC (ldquoNasdaqrdquo or the ldquoExchangerdquo) filed with the Securities and Exchange
Commission (ldquoCommissionrdquo) the proposed rule change as described in in Items I II and
III below which Items have been prepared by Nasdaq On April 6 2015 Nasdaq filed
Amendment No 1 which replaced the text of the original filing in its entirety On April
15 2015 Nasdaq filed Amendment No 2 which replaced the text of the original filing in
its entirety The Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons
I Self-Regulatory Organizationrsquos Statement of the Terms of Substance of the Proposed Rule Change
Nasdaq proposes to list and trade the shares of the First Trust Strategic Floating
Rate ETF (the ldquoFundrdquo) of the First Trust Strategic Floating Rate ETF (the ldquoFundrdquo) of
First Trust Exchange-Traded Fund IV (the ldquoTrustrdquo) under Nasdaq Rule 5735 (ldquoManaged
1 15 USC 78s(b)(1)
2 17 CFR 24019b-4
SR-NASDAQ-2015-011 Amendment No 2 Page 34 of 64
Fund Sharesrdquo)3 The shares of the Fund are collectively referred to herein as the
ldquoSharesrdquo
The text of the proposed rule change is available at
httpnasdaqcchwallstreetcom at Nasdaqrsquos principal office and at the Commissionrsquos
Public Reference Room
II Self-Regulatory Organizationrsquos Statement of the Purpose of and Statutory Basis for the Proposed Rule Change
In its filing with the Commission Nasdaq included statements concerning the
purpose of and basis for the proposed rule change The text of these statements may be
examined at the places specified in Item IV below Nasdaq has prepared summaries set
forth in Sections A B and C below of the most significant aspects of such statements
A Self-Regulatory Organizationrsquos Statement of the Purpose of and Statutory Basis for the Proposed Rule Change
1 Purpose
The Exchange proposes to list and trade the Shares of the Fund under Nasdaq
Rule 5735 which governs the listing and trading of Managed Fund Shares4 on the
3 The Commission approved Nasdaq Rule 5735 in Securities Exchange Act Release No 57962 (June 13 2008) 73 FR 35175 (June 20 2008) (SR-NASDAQ-2008shy039) There are already multiple actively-managed funds listed on the Exchange see eg Securities Exchange Act Release Nos 69464 (April 26 2013) 78 FR 25774 (May 2 2013) (SR-NASDAQ-2013-036) (order approving listing and trading of First Trust Senior Loan Fund) 68972 (February 22 2013) 78 FR 13721 (February 28 2013) (SR-NASDAQ-2012-147) (order approving listing and trading of First Trust High Yield LongShort ETF) 66489 (February 29 2012) 77 FR 13379 (March 6 2012) (SR-NASDAQ-2012-004) (order approving listing and trading of WisdomTree Emerging Markets Corporate Bond Fund) The Exchange believes the proposed rule change raises no significant issues not previously addressed in those prior Commission orders
4 A Managed Fund Share is a security that represents an interest in an investment company registered under the Investment Company Act of 1940 (15 USC 80ashy
SR-NASDAQ-2015-011 Amendment No 2 Page 35 of 64
Exchange The Fund will be an actively-managed exchange-traded fund (ldquoETFrdquo) The
Shares will be offered by the Trust which was established as a Massachusetts business
trust on September 15 20105 The Trust is registered with the Commission as an
investment company and has filed a registration statement on Form N-1A (ldquoRegistration
Statementrdquo) with the Commission6 The Fund will be a series of the Trust The Fund
intends to qualify each year as a regulated investment company (ldquoRICrdquo) under
Subchapter M of the Internal Revenue Code of 1986 as amended
First Trust Advisors LP will be the investment adviser (ldquoAdviserrdquo) to the Fund
First Trust Portfolios LP (the ldquoDistributorrdquo) will be the principal underwriter and
distributor of the Fundrsquos Shares The Bank of New York Mellon Corporation (ldquoBNYrdquo)
will act as the administrator accounting agent custodian and transfer agent to the Fund
1) (the ldquo1940 Actrdquo) organized as an open-end investment company or similar entity that invests in a portfolio of securities selected by its investment adviser consistent with its investment objectives and policies In contrast an open-end investment company that issues Index Fund Shares listed and traded on the Exchange under Nasdaq Rule 5705 seeks to provide investment results that correspond generally to the price and yield performance of a specific foreign or domestic stock index fixed income securities index or combination thereof
5 The Commission has issued an order upon which the Trust may rely granting certain exemptive relief under the 1940 Act See Investment Company Act Release No 30029 (April 10 2012) (File No 812-13795) (the ldquoExemptive Reliefrdquo) In addition the Commission has issued no-action relief upon which the Trust may rely pertaining to the Fundrsquos ability to invest in derivatives notwithstanding certain representations in the application for the Exemptive Relief See Commission No-Action Letter (December 6 2012)
6 See Post-Effective Amendment No 104 to Registration Statement on Form N-1A for the Trust dated January 29 2015 (File Nos 333-174332 and 811-22559) The descriptions of the Fund and the Shares contained herein are based in part on information in the Registration Statement
7
SR-NASDAQ-2015-011 Amendment No 2 Page 36 of 64
Paragraph (g) of Rule 5735 provides that if the investment adviser to the
investment company issuing Managed Fund Shares is affiliated with a broker-dealer
such investment adviser shall erect a ldquofire wallrdquo between the investment adviser and the
broker-dealer with respect to access to information concerning the composition andor
changes to such investment company portfolio7 In addition paragraph (g) further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio Rule 5735(g) is similar
to Nasdaq Rule 5705(b)(5)(A)(i) however paragraph (g) in connection with the
establishment of a ldquofire wallrdquo between the investment adviser and the broker-dealer
reflects the applicable open-end fundrsquos portfolio not an underlying benchmark index as
is the case with index-based funds The Adviser is not a broker-dealer although it is
affiliated with the Distributor a broker-dealer The Adviser has implemented a fire wall
An investment adviser to an open-end fund is required to be registered under the Investment Advisers Act of 1940 (the ldquoAdvisers Actrdquo) As a result the Adviser and its related personnel are subject to the provisions of Rule 204A-1 under the Advisers Act relating to codes of ethics This Rule requires investment advisers to adopt a code of ethics that reflects the fiduciary nature of the relationship to clients as well as compliance with other applicable securities laws Accordingly procedures designed to prevent the communication and misuse of non-public information by an investment adviser must be consistent with Rule 204A-1 under the Advisers Act In addition Rule 206(4)-7 under the Advisers Act makes it unlawful for an investment adviser to provide investment advice to clients unless such investment adviser has (i) adopted and implemented written policies and procedures reasonably designed to prevent violation by the investment adviser and its supervised persons of the Advisers Act and the Commission rules adopted thereunder (ii) implemented at a minimum an annual review regarding the adequacy of the policies and procedures established pursuant to subparagraph (i) above and the effectiveness of their implementation and (iii) designated an individual (who is a supervised person) responsible for administering the policies and procedures adopted under subparagraph (i) above
8
SR-NASDAQ-2015-011 Amendment No 2 Page 37 of 64
with respect to its broker-dealer affiliate regarding access to information concerning the
composition andor changes to the portfolio In addition personnel who make decisions
on the Fundrsquos portfolio composition will be subject to procedures designed to prevent the
use and dissemination of material non-public information regarding the Fundrsquos portfolio
In the event (a) the Adviser becomes or becomes newly affiliated with a broker-dealer
or (b) any new adviser or sub-adviser is a registered broker-dealer or becomes affiliated
with another broker-dealer it will implement a fire wall with respect to its relevant
personnel andor such broker-dealer affiliate as applicable regarding access to
information concerning the composition andor changes to the portfolio and will be
subject to procedures designed to prevent the use and dissemination of material
non-public information regarding such portfolio The Fund does not currently intend to
use a sub-adviser
First Trust Strategic Floating Rate ETF
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions8 at least 80 of its
The term ldquounder normal market conditionsrdquo as used herein includes but is not limited to the absence of adverse market economic political or other conditions including extreme volatility or trading halts in the fixed income markets or the financial markets generally operational issues causing dissemination of inaccurate market information or force majeure type events such as systems failure natural or man-made disaster act of God armed conflict act of terrorism riot or labor disruption or any similar intervening circumstance For temporary defensive purposes during the initial invest-up period and during periods of high cash inflows or outflows the Fund may depart from its principal investment strategies for example it may hold a higher than normal proportion of its assets in cash During such periods the Fund may not be able to achieve its investment objective The Fund may adopt a defensive strategy when the Adviser believes securities in which the Fund normally invests have elevated risks due to political or economic factors and in other extraordinary circumstances
SR-NASDAQ-2015-011 Amendment No 2 Page 38 of 64
net assets in a portfolio of the following types of floating-rate9 debt instruments issued by
US and non-US public- and private-sector entities floating-rate corporate10 and
government bonds and notes floating-rate agency securities 11 floating-rate instruments
of non-US issuers floating-rate privately-issued securities 12 floating-rate asset-backed
securities 13 floating-rate mortgage-backed securities14 floating-rate loans 15 and
9 For the avoidance of doubt the term ldquofloating-raterdquo shall also include similar terms such as ldquovariable-raterdquo and ldquoadjustable-raterdquo
10 The Adviser expects that under normal market conditions generally for a corporate bond to be considered as an eligible investment after taking into account such an investment at least 75 of the Fundrsquos net assets that are invested in floating-rate corporate bonds and as described below fixed-rate corporate bonds (in the aggregate) will be comprised of corporate bonds that have at the time of original issuance $100 million or more par amount outstanding
11 ldquoAgency securitiesrdquo for these purposes generally includes securities issued by the following entities Government National Mortgage Association (Ginnie Mae) Federal National Mortgage Association (Fannie Mae) Federal Home Loan Banks (FHLBanks) Federal Home Loan Mortgage Corporation (Freddie Mac) Farm Credit System (FCS) Farm Credit Banks (FCBanks) Student Loan Marketing Association (Sallie Mae) Resolution Funding Corporation (REFCORP) Financing Corporation (FICO) and the Farm Credit System (FCS) Financial Assistance Corporation (FAC) Agency securities can include but are not limited to mortgage-backed securities
12 ldquoPrivately-issued securitiesrdquo for these purposes generally includes Rule 144A securities other than mortgage-backed Rule 144A securities Under normal market conditions privately-issued securities will have at the time of original issuance $100 million or more principal amount outstanding to be considered eligible investments
13 Asset-backed securities are securities that are backed by a pool of assets The Fund currently intends to invest in asset-backed securities that are consumer asset-backed securities
14 Mortgage-backed securities which are securities that directly or indirectly represent a participation in or are secured by and payable from mortgage loans on real property will consist of (1) residential mortgage-backed securities (ldquoRMBSrdquo) (2) commercial mortgage-backed securities (ldquoCMBSrdquo) (3) stripped mortgage-backed securities (ldquoSMBSrdquo) which are mortgage-backed securities
SR-NASDAQ-2015-011 Amendment No 2 Page 39 of 64
investment companies16 (including investment companies advised by the Adviser) that
invest primarily in the foregoing types of debt instruments17 (collectively ldquoFloating Rate
Debt Instrumentsrdquo)
where mortgage payments are divided between paying the loanrsquos principal and paying the loanrsquos interest (4) collateralized mortgage obligations (ldquoCMOsrdquo) and real estate mortgage investment conduits (ldquoREMICsrdquo) which are mortgage-backed securities that are divided into multiple classes with each class being entitled to a different share of the principal and interest payments received from the pool of underlying assets
15 The floating-rate loans in which the Fund will invest will represent amounts borrowed by companies or other entities from banks and other lenders and a significant portion of such floating-rate loans may be rated below investment grade or unrated Floating-rate loans held by the Fund may be senior or subordinate obligations of the borrower and may or may not be secured by collateral First lien senior secured floating-rate loans are referred to herein as ldquosenior loansrdquo Floating-rate loans that are not senior loans (ie unsecured floating-rate loans and secured floating-rate loans that are not first lien floating-rate loans) are referred to herein as ldquojunior loansrdquo The Fund will generally invest in floating-rate loans that the Adviser deems to be liquid with readily available prices notwithstanding the foregoing the Fund may invest in floating-rate loans that are deemed illiquid so long as the Fund complies with the 15 limitation on investments of its net assets in illiquid assets described below under ldquoInvestment Restrictionsrdquo
16 The Fund currently anticipates investing only in registered open-end investment companies that are listed and traded in the US on registered exchanges (ie other ETFs) An ETF is an investment company registered under the 1940 Act that holds a portfolio of securities Many ETFs are designed to track the performance of a securities index including industry sector country and region indexes The Fund may invest in the securities of ETFs in excess of the limits imposed under the 1940 Act pursuant to exemptive orders obtained by other ETFs and their sponsors from the Commission In addition the Fund may invest in the securities of certain investment companies in excess of the limits imposed under the 1940 Act pursuant to an exemptive order obtained by the Trust and the Adviser from the Commission See Investment Company Act Release No 30377 (February 5 2013) (File No 812-13895) The ETFs in which the Fund may invest include Index Fund Shares (as described in Nasdaq Rule 5705) Portfolio Depository Receipts (as described in Nasdaq Rule 5705) and Managed Fund Shares (as described in Nasdaq Rule 5735) While the Fund may invest in inverse ETFs the Fund will not invest in leveraged or inverse leveraged (eg 2X or -3X) ETFs
SR-NASDAQ-2015-011 Amendment No 2 Page 40 of 64
At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade To be considered
ldquoinvestment graderdquo under normal market conditions rated Floating Rate Debt
Instruments will carry at the time of purchase a rating in the highest four rating
categories of at least one nationally recognized statistical ratings organization
(ldquoNRSROrdquo) (eg BBB- or higher by Standard amp Poorrsquos Ratings Services (ldquoSampPrdquo)
andor Fitch Ratings (ldquoFitchrdquo) or Baa3 or higher by Moodyrsquos Investors Service Inc
(ldquoMoodyrsquosrdquo)18 For unrated securities to be considered ldquoinvestment graderdquo under normal
market conditions such securities will be determined at the time of purchase to be of
comparable quality19 by the Adviser The Fund may invest up to 35 of its net assets in
securities that are at the time of investment rated below investment grade by each
NRSRO rating such securities (or securities that are unrated and determined by the
17 The liquidity of a security especially in the case of asset-backed and mortgage-backed securities will be a substantial factor in the Fundrsquos security selection process Consistent with the discussion below under ldquoInvestment Restrictionsrdquo the Fund will not purchase any Floating Rate Debt Instruments (including asset-backed securities and mortgage-backed securities) that in the Adviserrsquos opinion are illiquid if as a result more than 15 of the value of the Fundrsquos net assets will be invested in illiquid assets
18 For the avoidance of doubt if a security is rated by multiple NRSROs and receives different ratings the Fund will treat the security as being rated in the highest rating category received from an NRSRO
19 Comparable quality of unrated securities will be determined by the Adviser based on fundamental credit analysis of the unrated security and comparable NRSRO-rated securities On a best efforts basis the Adviser will attempt to make a rating determination based on publicly available data In making a ldquocomparable qualityrdquo determination the Adviser may consider for example whether the issuer of the security has issued other rated securities the nature and provisions of the relevant security whether the obligations under the relevant security are guaranteed by another entity and the rating of such guarantor (if any) relevant cash flows macroeconomic analysis andor sector or industry analysis
SR-NASDAQ-2015-011 Amendment No 2 Page 41 of 64
Adviser to be of comparable quality) commonly referred to as ldquohigh yieldrdquo or ldquojunkrdquo
bonds If subsequent to purchase by the Fund a security held by the Fund experiences a
decline in credit quality and falls below investment grade the Fund may continue to hold
the security and it will not cause the Fund to violate the 35 investment limitation
however the security will be taken into account for purposes of determining whether
purchases of additional securities will cause the Fund to violate such limitation
The Fund will limit its investments in asset-backed securities (excluding agency
mortgage-backed securities) and non-agency mortgage-backed securities (in the
aggregate) to 20 of its net assets20 In addition the Fund will limit its investments in
junior loans to 20 of its net assets
The Fund will hold debt securities (including in the aggregate Floating Rate
Debt Instruments and the fixed-rate debt securities described below) of at least 13
non-affiliated issuers
Other Investments
Under normal market conditions the Fund will invest primarily in the Floating
Rate Debt Instruments described above to meet its investment objective In addition the
Fund may invest up to 20 of its net assets in the following types of fixed-rate debt
securities corporate21 and government bonds and notes agency securities22 instruments
20 For the avoidance of doubt there is no limitation on the Fundrsquos investments in agency mortgage-backed securities
21 See footnote 10 above
22 See footnote 11 above
SR-NASDAQ-2015-011 Amendment No 2 Page 42 of 64
of non-US issuers in developed markets privately-issued securities 23 asset-backed
securities 24 mortgage-backed securities 25 municipal bonds money market securities26
and investment companies27 (including investment companies advised by the Adviser)
that invest primarily in the foregoing types of debt securities
Further to pursue its investment objective the Fund may invest up to 20 of the
value of its net assets in exchange-listed options on US Treasury futures contracts and
exchange-listed US Treasury futures contracts28 The use of these derivative
transactions may allow the Fund to obtain net long or short exposures to selected interest
rates These derivatives may also be used to hedge risks including interest rate risks and
credit risks associated with the Fundrsquos portfolio investments The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
23 See footnote 12 above
24 See footnote 13 above
25 See footnote 14 above
26 ldquoMoney market securitiesrdquo for these purposes generally includes short-term high-quality obligations issued or guaranteed by the US Treasury or the agencies or instrumentalities of the US government short-term high-quality securities issued or guaranteed by non-US governments agencies and instrumentalities repurchase agreements commercial paper (both asset-backed and non-assetshybacked) and deposits and other obligations of US and non-US banks and financial institutions
27 See footnote 16 above
28 At least 90 of the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be invested in instruments that trade in markets that are members of the Intermarket Surveillance Group (ldquoISGrdquo) (see footnote 40 below) or are parties to a comprehensive surveillance sharing agreement with the Exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 43 of 64
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index
Investment Restrictions
The Fund will not invest 25 or more of the value of its total assets in securities
of issuers in any one industry This restriction does not apply to (a) obligations issued or
guaranteed by the US government its agencies or instrumentalities or (b) securities of
other investment companies29
The Fund may hold up to an aggregate amount of 15 of its net assets in illiquid
assets (calculated at the time of investment) including Rule 144A securities deemed
illiquid by the Adviser30 The Fund will monitor its portfolio liquidity on an ongoing
basis to determine whether in light of current circumstances an adequate level of
liquidity is being maintained and will consider taking appropriate steps in order to
maintain adequate liquidity if through a change in values net assets or other
circumstances more than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid
assets include securities subject to contractual or other restrictions on resale and other
29 See Form N-1A Item 9 The Commission has taken the position that a fund is concentrated if it invests more than 25 of the value of its total assets in any one industry See eg Investment Company Act Release No 9011 (October 30 1975) 40 FR 54241 (November 21 1975)
30 In reaching liquidity decisions the Adviser may consider the following factors the frequency of trades and quotes for the security the number of dealers wishing to purchase or sell the security and the number of other potential purchasers dealer undertakings to make a market in the security and the nature of the security and the nature of the marketplace in which it trades (eg the time needed to dispose of the security the method of soliciting offers and the mechanics of transfer)
SR-NASDAQ-2015-011 Amendment No 2 Page 44 of 64
instruments that lack readily available markets as determined in accordance with
Commission staff guidance31
The Fund will not invest in non-US equity securities
Creation and Redemption of Shares
The Fund will issue and redeem Shares on a continuous basis at net asset value
(ldquoNAVrdquo)32 only in large blocks of Shares (ldquoCreation Unitsrdquo) in transactions with
authorized participants generally including broker-dealers and large institutional
investors (ldquoAuthorized Participantsrdquo) Creation Units generally will consist of 50000
Shares although this may change from time to time Creation Units however are not
expected to consist of less than 50000 Shares As described in the Registration
Statement and consistent with the Exemptive Relief the Fund will issue and redeem
Creation Units in exchange for an in-kind portfolio of instruments andor cash in lieu of
31 The Commission has stated that long-standing Commission guidelines have required open-end funds to hold no more than 15 of their net assets in illiquid securities and other illiquid assets See Investment Company Act Release No 28193 (March 11 2008) 73 FR 14618 (March 18 2008) footnote 34 See also Investment Company Act Release No 5847 (October 21 1969) 35 FR 19989 (December 31 1970) (Statement Regarding ldquoRestricted Securitiesrdquo) Investment Company Act Release No 18612 (March 12 1992) 57 FR 9828 (March 20 1992) (Revisions of Guidelines to Form N-1A) A fundrsquos portfolio security is illiquid if it cannot be disposed of in the ordinary course of business within seven days at approximately the value ascribed to it by the fund See Investment Company Act Release No 14983 (March 12 1986) 51 FR 9773 (March 21 1986) (adopting amendments to Rule 2a-7 under the 1940 Act) Investment Company Act Release No 17452 (April 23 1990) 55 FR 17933 (April 30 1990) (adopting Rule 144A under the Securities Act of 1933)
32 The NAV of the Fundrsquos Shares generally will be calculated once daily Monday through Friday as of the close of regular trading on the New York Stock Exchange generally 400 pm Eastern Time (the ldquoNAV Calculation Timerdquo) NAV per Share will be calculated by dividing the Fundrsquos net assets by the number of Fund Shares outstanding For more information regarding the valuation of Fund investments in calculating the Fundrsquos NAV see the Registration Statement
SR-NASDAQ-2015-011 Amendment No 2 Page 45 of 64
such instruments (the ldquoCreation Basketrdquo) In addition if there is a difference between the
NAV attributable to a Creation Unit and the market value of the Creation Basket
exchanged for the Creation Unit the party conveying instruments with the lower value
will pay to the other an amount in cash equal to the difference (referred to as the ldquoCash
Componentrdquo)
Creations and redemptions must be made by or through an Authorized Participant
that has executed an agreement that has been agreed to by the Distributor and BNY with
respect to creations and redemptions of Creation Units All standard orders to create
Creation Units must be received by the transfer agent no later than the closing time of the
regular trading session on the New York Stock Exchange (ordinarily 400 pm Eastern
Time) (the ldquoClosing Timerdquo) in each case on the date such order is placed in order for the
creation of Creation Units to be effected based on the NAV of Shares as next determined
on such date after receipt of the order in proper form Shares may be redeemed only in
Creation Units at their NAV next determined after receipt not later than the Closing Time
of a redemption request in proper form by the Fund through the transfer agent and only
on a business day
The Fundrsquos custodian through the National Securities Clearing Corporation will
make available on each business day prior to the opening of business of the Exchange
the list of the names and quantities of the instruments comprising the Creation Basket as
well as the estimated Cash Component (if any) for that day The published Creation
Basket will apply until a new Creation Basket is announced on the following business
day prior to commencement of trading in the Shares
SR-NASDAQ-2015-011 Amendment No 2 Page 46 of 64
Net Asset Value
The Fundrsquos NAV will be determined as of the close of trading (normally
400 pm Eastern Time) on each day the New York Stock Exchange is open for
business NAV will be calculated for the Fund by taking the market price of the Fundrsquos
total assets including interest or dividends accrued but not yet collected less all
liabilities and dividing such amount by the total number of Shares outstanding The
result rounded to the nearest cent will be the NAV per Share All valuations will be
subject to review by the Board of Trustees of the Trust (ldquoTrust Boardrdquo) or its delegate
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with valuation procedures (which may be revised from time to time) adopted by the Trust
Board (the ldquoValuation Proceduresrdquo) and in accordance with the 1940 Act A market
valuation generally means a valuation (i) obtained from an exchange an independent
pricing service (ldquoPricing Servicerdquo) or a major market maker (or dealer) or (ii) based on a
price quotation or other equivalent indication of value supplied by an exchange a Pricing
Service or a major market maker (or dealer) The information summarized below is
based on the Valuation Procedures as currently in effect however as noted above the
Valuation Procedures are amended from time to time and therefore such information is
subject to change
Certain securities including Floating Rate Debt Instruments in which the Fund
may invest will not be listed on any securities exchange or board of trade Such
securities will typically be bought and sold by institutional investors in individually
negotiated private transactions that function in many respects like an over-the-counter
SR-NASDAQ-2015-011 Amendment No 2 Page 47 of 64
secondary market although typically no formal market makers will exist Certain
securities particularly debt securities will have few or no trades or trade infrequently
and information regarding a specific security may not be widely available or may be
incomplete Accordingly determinations of the fair value of debt securities may be
based on infrequent and dated information Because there is less reliable objective data
available elements of judgment may play a greater role in valuation of debt securities
than for other types of securities Typically Floating Rate Debt Instruments and other
debt securities in which the Fund may invest (other than those described below) will be
valued using information provided by a Pricing Service Debt securities having a
remaining maturity of 60 days or less when purchased will be valued at cost adjusted for
amortization of premiums and accretion of discounts provided the Adviserrsquos pricing
committee (the ldquoPricing Committeerdquo) has determined that the use of amortized cost is an
appropriate reflection of fair value given market and issuer-specific conditions existing at
the time of the determination Overnight repurchase agreements will be valued at cost
and term repurchase agreements (ie those whose maturity exceeds seven days) will be
valued at the average of the bid quotations obtained daily from at least two recognized
dealers
Asset-backed and mortgage-backed securities will generally be valued by using a
Pricing Service If a Pricing Service does not cover a particular asset-backed or
mortgage-backed security or discontinues covering a particular asset-backed or
mortgage-backed security the security will be priced using broker quotes generally
provided by brokers that make or participate in markets in the security To derive values
Pricing Services and broker-dealers may use matrix pricing and valuation models as well
SR-NASDAQ-2015-011 Amendment No 2 Page 48 of 64
as recent market transactions for the same or similar assets As it deems appropriate the
Pricing Committee may determine that a Pricing Service price does not represent an
accurate value of an asset-backed or mortgage-backed security based on broker quotes it
receives a recent trade in the security by the Fund information from a portfolio manager
or other market information In the event that the Pricing Committee determines that the
Pricing Service price is unreliable or inaccurate based on such other information broker
quotes may be used Additionally if the Pricing Committee determines that the price of
an asset-backed or mortgage-backed security obtained from a Pricing Service and
available broker quotes is unreliable or inaccurate due to market conditions or other
reasons or if a Pricing Service price or broker quote is unavailable the security will be
valued using fair value pricing as described below
Equity securities listed on any exchange other than the Exchange will be valued at
the last sale price on the exchange on which they are principally traded on the business
day as of which such value is being determined Equity securities listed on the Exchange
will be valued at the official closing price on the business day as of which such value is
being determined If there has been no sale on such day or no official closing price in
the case of securities traded on the Exchange the securities will be valued using fair
value pricing as described below Equity securities traded on more than one securities
exchange will be valued at the last sale price or official closing price as applicable on
the business day as of which such value is being determined at the close of the exchange
representing the principal market for such securities
Exchange-traded options and futures contracts will be valued at the closing price
in the market where such contracts are principally traded
SR-NASDAQ-2015-011 Amendment No 2 Page 49 of 64
Certain securities including Floating Rate Debt Instruments in which the Fund
will invest will not be able to be priced by pre-established pricing methods Such
securities may be valued by the Trust Board or its delegate at fair value The use of fair
value pricing by the Fund will be governed by the Valuation Procedures and conducted in
accordance with the provisions of the 1940 Act Valuing the Fundrsquos securities using fair
value pricing will result in using prices for those securities that may differ from current
market valuations or official closing prices on the applicable exchange
Availability of Information
The Fundrsquos website (wwwftportfolioscom) which will be publicly available
prior to the public offering of Shares will include a form of the prospectus for the Fund
that may be downloaded The website will include the Sharesrsquo ticker CUSIP and
exchange information along with additional quantitative information updated on a daily
basis including for the Fund (1) daily trading volume the prior business dayrsquos reported
NAV and closing price mid-point of the bidask spread at the time of calculation of such
NAV (the ldquoBidAsk Pricerdquo)33 and a calculation of the premium and discount of the
BidAsk Price against the NAV and (2) data in chart format displaying the frequency
distribution of discounts and premiums of the daily BidAsk Price against the NAV
within appropriate ranges for each of the four previous calendar quarters On each
business day before commencement of trading in Shares in the Regular Market Session34
33 The BidAsk Price of the Fund will be determined using the mid-point of the highest bid and the lowest offer on the Exchange as of the time of calculation of the Fundrsquos NAV The records relating to BidAsk Prices will be retained by the Fund and its service providers
34 See Nasdaq Rule 4120(b)(4) (describing the three trading sessions on the Exchange (1) Pre-Market Session from 4 am to 930 am Eastern Time (2)
SR-NASDAQ-2015-011 Amendment No 2 Page 50 of 64
on the Exchange the Fund will disclose on its website the identities and quantities of the
portfolio of securities and other assets (the ldquoDisclosed Portfoliordquo as defined in Nasdaq
Rule 5735(c)(2)) held by the Fund that will form the basis for the Fundrsquos calculation of
NAV at the end of the business day 35 The Fundrsquos disclosure of derivative positions in
the Disclosed Portfolio will include information that market participants can use to value
these positions intraday On a daily basis the Fund will disclose on the Fundrsquos website
the following information regarding each portfolio holding as applicable to the type of
holding ticker symbol CUSIP number or other identifier if any a description of the
holding (including the type of holding) the identity of the security or other asset or
instrument underlying the holding if any for options the option strike price quantity
held (as measured by for example par value notional value or number of shares
contracts or units) maturity date if any coupon rate if any effective date if any market
value of the holding and percentage weighting of the holding in the Fundrsquos portfolio
The website information will be publicly available at no charge
In addition for the Fund an estimated value defined in Rule 5735(c)(3) as the
ldquoIntraday Indicative Valuerdquo that reflects an estimated intraday value of the Fundrsquos
Disclosed Portfolio will be disseminated Moreover the Intraday Indicative Value
Regular Market Session from 930 am to 4 pm or 415 pm Eastern Time and (3) Post-Market Session from 4 pm or 415 pm to 8 pm Eastern Time)
Under accounting procedures to be followed by the Fund trades made on the prior business day (ldquoTrdquo) will be booked and reflected in NAV on the current business day (ldquoT+1rdquo) Accordingly the Fund will be able to disclose at the beginning of the business day the portfolio that will form the basis for the NAV calculation at the end of the business day
35
SR-NASDAQ-2015-011 Amendment No 2 Page 51 of 64
available on the NASDAQ OMX Information LLC proprietary index data service36 will
be based upon the current value for the components of the Disclosed Portfolio and will be
updated and widely disseminated by one or more major market data vendors and broadly
displayed at least every 15 seconds during the Regular Market Session The Intraday
Indicative Value will be based on quotes and closing prices from the securitiesrsquo local
market and may not reflect events that occur subsequent to the local marketrsquos close
Premiums and discounts between the Intraday Indicative Value and the market price may
occur This should not be viewed as a ldquoreal timerdquo update of the NAV per Share of the
Fund which is calculated only once a day
The dissemination of the Intraday Indicative Value together with the Disclosed
Portfolio will allow investors to determine the value of the underlying portfolio of the
Fund on a daily basis and will provide a close estimate of that value throughout the
trading day
Investors will also be able to obtain the Fundrsquos Statement of Additional
Information (ldquoSAIrdquo) the Fundrsquos annual and semi-annual reports (together ldquoShareholder
Reportsrdquo) and its Form N-CSR and Form N-SAR filed twice a year The Fundrsquos SAI
and Shareholder Reports will be available free upon request from the Fund and those
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or
downloaded from the Commissionrsquos website at wwwsecgov Information regarding
Currently the NASDAQ OMX Global Index Data Service (ldquoGIDSrdquo) is the NASDAQ OMX global index data feed service offering real-time updates daily summary messages and access to widely followed indexes and Intraday Indicative Values for ETFs GIDS provides investment professionals with the daily information needed to track or trade NASDAQ OMX indexes listed ETFs or third-party partner indexes and ETFs
36
SR-NASDAQ-2015-011 Amendment No 2 Page 52 of 64
market price and trading volume of the Shares will be continually available on a real-time
basis throughout the day on brokersrsquo computer screens and other electronic services
Information regarding the previous dayrsquos closing price and trading volume information
for the Shares will be published daily in the financial section of newspapers Quotation
and last sale information for the Shares will be available via Nasdaq proprietary quote
and trade services as well as in accordance with the Unlisted Trading Privileges and the
Consolidated Tape Association (ldquoCTArdquo) plans for the Shares Quotation and last sale
information for the other ETFs in which the Fund will invest will be available via the
quote and trade services of their respective primary exchanges as well as in accordance
with the Unlisted Trading Privileges and the CTA plans as applicable Quotation and
last sale information for US exchange-traded options will be available via the Options
Price Reporting Authority Intraday executable price quotations on Floating Rate Debt
Instruments and other assets not traded on an exchange will be available from major
broker-dealer firms or market data vendors as well as from automated quotation systems
published or other public sources or online information services Additionally the Trade
Reporting and Compliance Engine (ldquoTRACErdquo) of the Financial Industry Regulatory
Authority (ldquoFINRArdquo) will be a source of price information for corporate bonds
privately-issued securities mortgage-backed securities and asset-backed securities to the
extent transactions in such securities are reported to TRACE37 For exchange-traded
Broker-dealers that are FINRA member firms have an obligation to report transactions in specified debt securities to TRACE to the extent required under applicable FINRA rules Generally such debt securities will have at issuance a maturity that exceeds one calendar year
37
SR-NASDAQ-2015-011 Amendment No 2 Page 53 of 64
assets intraday pricing information will be available directly from the applicable listing
exchange
Additional information regarding the Fund and the Shares including investment
strategies risks creation and redemption procedures fees Fund holdings disclosure
policies distributions and taxes will be included in the Registration Statement
Initial and Continued Listing
The Shares will be subject to Rule 5735 which sets forth the initial and continued
listing criteria applicable to Managed Fund Shares The Exchange represents that for
initial andor continued listing the Fund must be in compliance with Rule 10A-338 under
the Act A minimum of 100000 Shares will be outstanding at the commencement of
trading on the Exchange The Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the NAV and the
Disclosed Portfolio will be made available to all market participants at the same time
Trading Halts
With respect to trading halts the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading in the Shares of the Fund Nasdaq will
halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12) Trading may be
halted because of market conditions or for reasons that in the view of the Exchange
make trading in the Shares inadvisable These may include (1) the extent to which
trading is not occurring in the securities andor the other assets constituting the Disclosed
Portfolio of the Fund or (2) whether other unusual conditions or circumstances
See 17 CFR 24010A-3 38
SR-NASDAQ-2015-011 Amendment No 2 Page 54 of 64
detrimental to the maintenance of a fair and orderly market are present Trading in the
Shares also will be subject to Rule 5735(d)(2)(D) which sets forth circumstances under
which Shares of the Fund may be halted
Trading Rules
Nasdaq deems the Shares to be equity securities thus rendering trading in the
Shares subject to Nasdaqrsquos existing rules governing the trading of equity securities
Nasdaq will allow trading in the Shares from 400 am until 800 pm Eastern Time
The Exchange has appropriate rules to facilitate transactions in the Shares during all
trading sessions As provided in Nasdaq Rule 5735(b)(3) the minimum price variation
for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $001
Surveillance
The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws39 The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities laws
The surveillances referred to above generally focus on detecting securities trading
outside their normal patterns which could be indicative of manipulative or other violative
activity When such situations are detected surveillance analysis follows and
FINRA surveils trading on the Exchange pursuant to a regulatory services agreement The Exchange is responsible for FINRArsquos performance under this regulatory services agreement
39
SR-NASDAQ-2015-011 Amendment No 2 Page 55 of 64
investigations are opened where appropriate to review the behavior of all relevant
parties for all relevant trading violations
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 56 of 64
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
SR-NASDAQ-2015-011 Amendment No 2 Page 57 of 64
2 Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
SR-NASDAQ-2015-011 Amendment No 2 Page 58 of 64
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
SR-NASDAQ-2015-011 Amendment No 2 Page 59 of 64
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
SR-NASDAQ-2015-011 Amendment No 2 Page 60 of 64
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 61 of 64
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
SR-NASDAQ-2015-011 Amendment No 2 Page 62 of 64
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
B Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
C Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received From Members Participants or Others
Written comments were neither solicited nor received
III Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Within 45 days of the date of publication of this notice in the Federal Register or
within such longer period (i) as the Commission may designate up to 90 days of such date
if it finds such longer period to be appropriate and publishes its reasons for so finding or
(ii) as to which the Exchange consents the Commission shall (a) by order approve or
disapprove such proposed rule change or (b) institute proceedings to determine whether
the proposed rule change should be disapproved
SR-NASDAQ-2015-011 Amendment No 2 Page 63 of 64
IV Solicitation of Comments
Interested persons are invited to submit written data views and arguments
concerning the foregoing including whether the proposed rule change is consistent with
the Act Comments may be submitted by any of the following methods
Electronic comments
bull Use the Commissionrsquos Internet comment form
(httpwwwsecgovrulessroshtml) or
bull Send an e-mail to rule-commentssecgov Please include File Number
SR-NASDAQ-2015-011 on the subject line
Paper comments
bull Send paper comments in triplicate to Brent J Fields Secretary Securities and
Exchange Commission Station Place 100 F Street NE Washington DC
20549-9303
All submissions should refer to File Number SR-NASDAQ-2015-011 This file number
should be included on the subject line if e-mail is used To help the Commission process
and review your comments more efficiently please use only one method The
Commission will post all comments on the Commissionrsquos Internet website
httpwwwsecgovrulessroshtml
Copies of the submission all subsequent amendments all written statements with
respect to the proposed rule change that are filed with the Commission and all written
communications relating to the proposed rule change between the Commission and any
person other than those that may be withheld from the public in accordance with the
provisions of 5 USC 552 will be available for website viewing and printing in the
Commissionrsquos Public Reference Room 100 F Street NE Washington DC 20549 on
SR-NASDAQ-2015-011 Amendment No 2 Page 64 of 64
official business days between the hours of 1000 am and 300 pm Copies of the filing
also will be available for inspection and copying at the principal office of Nasdaq All
comments received will be posted without change the Commission does not edit
personal identifying information from submissions You should submit only information
that you wish to make available publicly
All submissions should refer to File Number SR-NASDAQ-2015-011 and should
be submitted on or before [insert date 21 days from publication in the Federal Register]
For the Commission by the Division of Trading and Markets pursuant to
delegated authority41
Kevin M OrsquoNeill Deputy Secretary
17 CFR 20030-3(a)(12) 41
SR-NASDAQ-2015-011 Amendment No 2 Page 10 of 64
securities that are at the time of investment rated below investment grade by each
NRSRO rating such securities (or securities that are unrated and determined by the
Adviser to be of comparable quality) commonly referred to as ldquohigh yieldrdquo or ldquojunkrdquo
bonds If subsequent to purchase by the Fund a security held by the Fund experiences a
decline in credit quality and falls below investment grade the Fund may continue to hold
the security and it will not cause the Fund to violate the 35 investment limitation
however the security will be taken into account for purposes of determining whether
purchases of additional securities will cause the Fund to violate such limitation
The Fund will limit its investments in asset-backed securities (excluding agency
mortgage-backed securities) and non-agency mortgage-backed securities (in the
aggregate) to 20 of its net assets20 In addition the Fund will limit its investments in
junior loans to 20 of its net assets
The Fund will hold debt securities (including in the aggregate Floating Rate
Debt Instruments and the fixed-rate debt securities described below) of at least 13
non-affiliated issuers
Other Investments
Under normal market conditions the Fund will invest primarily in the Floating
Rate Debt Instruments described above to meet its investment objective In addition the
determination based on publicly available data In making a ldquocomparable qualityrdquo determination the Adviser may consider for example whether the issuer of the security has issued other rated securities the nature and provisions of the relevant security whether the obligations under the relevant security are guaranteed by another entity and the rating of such guarantor (if any) relevant cash flows macroeconomic analysis andor sector or industry analysis
For the avoidance of doubt there is no limitation on the Fundrsquos investments in agency mortgage-backed securities
20
SR-NASDAQ-2015-011 Amendment No 2 Page 11 of 64
Fund may invest up to 20 of its net assets in the following types of fixed-rate debt
securities corporate21 and government bonds and notes agency securities22 instruments
of non-US issuers in developed markets privately-issued securities 23 asset-backed
securities 24 mortgage-backed securities 25 municipal bonds money market securities26
and investment companies27 (including investment companies advised by the Adviser)
that invest primarily in the foregoing types of debt securities
Further to pursue its investment objective the Fund may invest up to 20 of the
value of its net assets in exchange-listed options on US Treasury futures contracts and
exchange-listed US Treasury futures contracts28 The use of these derivative
transactions may allow the Fund to obtain net long or short exposures to selected interest
rates These derivatives may also be used to hedge risks including interest rate risks and
21 See footnote 10 above
22 See footnote 11 above
23 See footnote 12 above
24 See footnote 13 above
25 See footnote 14 above
26 ldquoMoney market securitiesrdquo for these purposes generally includes short-term high-quality obligations issued or guaranteed by the US Treasury or the agencies or instrumentalities of the US government short-term high-quality securities issued or guaranteed by non-US governments agencies and instrumentalities repurchase agreements commercial paper (both asset-backed and non-assetshybacked) and deposits and other obligations of US and non-US banks and financial institutions
27 See footnote 16 above
28 At least 90 of the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be invested in instruments that trade in markets that are members of the Intermarket Surveillance Group (ldquoISGrdquo) (see footnote 40 below) or are parties to a comprehensive surveillance sharing agreement with the Exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 12 of 64
credit risks associated with the Fundrsquos portfolio investments The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index
Investment Restrictions
The Fund will not invest 25 or more of the value of its total assets in securities
of issuers in any one industry This restriction does not apply to (a) obligations issued or
guaranteed by the US government its agencies or instrumentalities or (b) securities of
other investment companies29
The Fund may hold up to an aggregate amount of 15 of its net assets in illiquid
assets (calculated at the time of investment) including Rule 144A securities deemed
illiquid by the Adviser30 The Fund will monitor its portfolio liquidity on an ongoing
basis to determine whether in light of current circumstances an adequate level of
liquidity is being maintained and will consider taking appropriate steps in order to
maintain adequate liquidity if through a change in values net assets or other
circumstances more than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid
assets include securities subject to contractual or other restrictions on resale and other
29 See Form N-1A Item 9 The Commission has taken the position that a fund is concentrated if it invests more than 25 of the value of its total assets in any one industry See eg Investment Company Act Release No 9011 (October 30 1975) 40 FR 54241 (November 21 1975)
30 In reaching liquidity decisions the Adviser may consider the following factors the frequency of trades and quotes for the security the number of dealers wishing to purchase or sell the security and the number of other potential purchasers dealer undertakings to make a market in the security and the nature of the security and the nature of the marketplace in which it trades (eg the time needed to dispose of the security the method of soliciting offers and the mechanics of transfer)
SR-NASDAQ-2015-011 Amendment No 2 Page 13 of 64
instruments that lack readily available markets as determined in accordance with
Commission staff guidance31
The Fund will not invest in non-US equity securities
Creation and Redemption of Shares
The Fund will issue and redeem Shares on a continuous basis at net asset value
(ldquoNAVrdquo)32 only in large blocks of Shares (ldquoCreation Unitsrdquo) in transactions with
authorized participants generally including broker-dealers and large institutional
investors (ldquoAuthorized Participantsrdquo) Creation Units generally will consist of 50000
Shares although this may change from time to time Creation Units however are not
expected to consist of less than 50000 Shares As described in the Registration
Statement and consistent with the Exemptive Relief the Fund will issue and redeem
Creation Units in exchange for an in-kind portfolio of instruments andor cash in lieu of
31 The Commission has stated that long-standing Commission guidelines have required open-end funds to hold no more than 15 of their net assets in illiquid securities and other illiquid assets See Investment Company Act Release No 28193 (March 11 2008) 73 FR 14618 (March 18 2008) footnote 34 See also Investment Company Act Release No 5847 (October 21 1969) 35 FR 19989 (December 31 1970) (Statement Regarding ldquoRestricted Securitiesrdquo) Investment Company Act Release No 18612 (March 12 1992) 57 FR 9828 (March 20 1992) (Revisions of Guidelines to Form N-1A) A fundrsquos portfolio security is illiquid if it cannot be disposed of in the ordinary course of business within seven days at approximately the value ascribed to it by the fund See Investment Company Act Release No 14983 (March 12 1986) 51 FR 9773 (March 21 1986) (adopting amendments to Rule 2a-7 under the 1940 Act) Investment Company Act Release No 17452 (April 23 1990) 55 FR 17933 (April 30 1990) (adopting Rule 144A under the Securities Act of 1933)
32 The NAV of the Fundrsquos Shares generally will be calculated once daily Monday through Friday as of the close of regular trading on the New York Stock Exchange generally 400 pm Eastern Time (the ldquoNAV Calculation Timerdquo) NAV per Share will be calculated by dividing the Fundrsquos net assets by the number of Fund Shares outstanding For more information regarding the valuation of Fund investments in calculating the Fundrsquos NAV see the Registration Statement
SR-NASDAQ-2015-011 Amendment No 2 Page 14 of 64
such instruments (the ldquoCreation Basketrdquo) In addition if there is a difference between the
NAV attributable to a Creation Unit and the market value of the Creation Basket
exchanged for the Creation Unit the party conveying instruments with the lower value
will pay to the other an amount in cash equal to the difference (referred to as the ldquoCash
Componentrdquo)
Creations and redemptions must be made by or through an Authorized Participant
that has executed an agreement that has been agreed to by the Distributor and BNY with
respect to creations and redemptions of Creation Units All standard orders to create
Creation Units must be received by the transfer agent no later than the closing time of the
regular trading session on the New York Stock Exchange (ordinarily 400 pm Eastern
Time) (the ldquoClosing Timerdquo) in each case on the date such order is placed in order for the
creation of Creation Units to be effected based on the NAV of Shares as next determined
on such date after receipt of the order in proper form Shares may be redeemed only in
Creation Units at their NAV next determined after receipt not later than the Closing Time
of a redemption request in proper form by the Fund through the transfer agent and only
on a business day
The Fundrsquos custodian through the National Securities Clearing Corporation will
make available on each business day prior to the opening of business of the Exchange
the list of the names and quantities of the instruments comprising the Creation Basket as
well as the estimated Cash Component (if any) for that day The published Creation
Basket will apply until a new Creation Basket is announced on the following business
day prior to commencement of trading in the Shares
SR-NASDAQ-2015-011 Amendment No 2 Page 15 of 64
Net Asset Value
The Fundrsquos NAV will be determined as of the close of trading (normally
400 pm Eastern Time) on each day the New York Stock Exchange is open for
business NAV will be calculated for the Fund by taking the market price of the Fundrsquos
total assets including interest or dividends accrued but not yet collected less all
liabilities and dividing such amount by the total number of Shares outstanding The
result rounded to the nearest cent will be the NAV per Share All valuations will be
subject to review by the Board of Trustees of the Trust (ldquoTrust Boardrdquo) or its delegate
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with valuation procedures (which may be revised from time to time) adopted by the Trust
Board (the ldquoValuation Proceduresrdquo) and in accordance with the 1940 Act A market
valuation generally means a valuation (i) obtained from an exchange an independent
pricing service (ldquoPricing Servicerdquo) or a major market maker (or dealer) or (ii) based on a
price quotation or other equivalent indication of value supplied by an exchange a Pricing
Service or a major market maker (or dealer) The information summarized below is
based on the Valuation Procedures as currently in effect however as noted above the
Valuation Procedures are amended from time to time and therefore such information is
subject to change
Certain securities including Floating Rate Debt Instruments in which the Fund
may invest will not be listed on any securities exchange or board of trade Such
securities will typically be bought and sold by institutional investors in individually
negotiated private transactions that function in many respects like an over-the-counter
SR-NASDAQ-2015-011 Amendment No 2 Page 16 of 64
secondary market although typically no formal market makers will exist Certain
securities particularly debt securities will have few or no trades or trade infrequently
and information regarding a specific security may not be widely available or may be
incomplete Accordingly determinations of the fair value of debt securities may be
based on infrequent and dated information Because there is less reliable objective data
available elements of judgment may play a greater role in valuation of debt securities
than for other types of securities Typically Floating Rate Debt Instruments and other
debt securities in which the Fund may invest (other than those described below) will be
valued using information provided by a Pricing Service Debt securities having a
remaining maturity of 60 days or less when purchased will be valued at cost adjusted for
amortization of premiums and accretion of discounts provided the Adviserrsquos pricing
committee (the ldquoPricing Committeerdquo) has determined that the use of amortized cost is an
appropriate reflection of fair value given market and issuer-specific conditions existing at
the time of the determination Overnight repurchase agreements will be valued at cost
and term repurchase agreements (ie those whose maturity exceeds seven days) will be
valued at the average of the bid quotations obtained daily from at least two recognized
dealers
Asset-backed and mortgage-backed securities will generally be valued by using a
Pricing Service If a Pricing Service does not cover a particular asset-backed or
mortgage-backed security or discontinues covering a particular asset-backed or
mortgage-backed security the security will be priced using broker quotes generally
provided by brokers that make or participate in markets in the security To derive values
Pricing Services and broker-dealers may use matrix pricing and valuation models as well
SR-NASDAQ-2015-011 Amendment No 2 Page 17 of 64
as recent market transactions for the same or similar assets As it deems appropriate the
Pricing Committee may determine that a Pricing Service price does not represent an
accurate value of an asset-backed or mortgage-backed security based on broker quotes it
receives a recent trade in the security by the Fund information from a portfolio manager
or other market information In the event that the Pricing Committee determines that the
Pricing Service price is unreliable or inaccurate based on such other information broker
quotes may be used Additionally if the Pricing Committee determines that the price of
an asset-backed or mortgage-backed security obtained from a Pricing Service and
available broker quotes is unreliable or inaccurate due to market conditions or other
reasons or if a Pricing Service price or broker quote is unavailable the security will be
valued using fair value pricing as described below
Equity securities listed on any exchange other than the Exchange will be valued at
the last sale price on the exchange on which they are principally traded on the business
day as of which such value is being determined Equity securities listed on the Exchange
will be valued at the official closing price on the business day as of which such value is
being determined If there has been no sale on such day or no official closing price in
the case of securities traded on the Exchange the securities will be valued using fair
value pricing as described below Equity securities traded on more than one securities
exchange will be valued at the last sale price or official closing price as applicable on
the business day as of which such value is being determined at the close of the exchange
representing the principal market for such securities
Exchange-traded options and futures contracts will be valued at the closing price
in the market where such contracts are principally traded
SR-NASDAQ-2015-011 Amendment No 2 Page 18 of 64
Certain securities including Floating Rate Debt Instruments in which the Fund
will invest will not be able to be priced by pre-established pricing methods Such
securities may be valued by the Trust Board or its delegate at fair value The use of fair
value pricing by the Fund will be governed by the Valuation Procedures and conducted in
accordance with the provisions of the 1940 Act Valuing the Fundrsquos securities using fair
value pricing will result in using prices for those securities that may differ from current
market valuations or official closing prices on the applicable exchange
Availability of Information
The Fundrsquos website (wwwftportfolioscom) which will be publicly available
prior to the public offering of Shares will include a form of the prospectus for the Fund
that may be downloaded The website will include the Sharesrsquo ticker CUSIP and
exchange information along with additional quantitative information updated on a daily
basis including for the Fund (1) daily trading volume the prior business dayrsquos reported
NAV and closing price mid-point of the bidask spread at the time of calculation of such
NAV (the ldquoBidAsk Pricerdquo)33 and a calculation of the premium and discount of the
BidAsk Price against the NAV and (2) data in chart format displaying the frequency
distribution of discounts and premiums of the daily BidAsk Price against the NAV
within appropriate ranges for each of the four previous calendar quarters On each
business day before commencement of trading in Shares in the Regular Market Session34
33 The BidAsk Price of the Fund will be determined using the mid-point of the highest bid and the lowest offer on the Exchange as of the time of calculation of the Fundrsquos NAV The records relating to BidAsk Prices will be retained by the Fund and its service providers
34 See Nasdaq Rule 4120(b)(4) (describing the three trading sessions on the Exchange (1) Pre-Market Session from 4 am to 930 am Eastern Time (2)
SR-NASDAQ-2015-011 Amendment No 2 Page 19 of 64
on the Exchange the Fund will disclose on its website the identities and quantities of the
portfolio of securities and other assets (the ldquoDisclosed Portfoliordquo as defined in Nasdaq
Rule 5735(c)(2)) held by the Fund that will form the basis for the Fundrsquos calculation of
NAV at the end of the business day 35 The Fundrsquos disclosure of derivative positions in
the Disclosed Portfolio will include information that market participants can use to value
these positions intraday On a daily basis the Fund will disclose on the Fundrsquos website
the following information regarding each portfolio holding as applicable to the type of
holding ticker symbol CUSIP number or other identifier if any a description of the
holding (including the type of holding) the identity of the security or other asset or
instrument underlying the holding if any for options the option strike price quantity
held (as measured by for example par value notional value or number of shares
contracts or units) maturity date if any coupon rate if any effective date if any market
value of the holding and percentage weighting of the holding in the Fundrsquos portfolio
The website information will be publicly available at no charge
In addition for the Fund an estimated value defined in Rule 5735(c)(3) as the
ldquoIntraday Indicative Valuerdquo that reflects an estimated intraday value of the Fundrsquos
Disclosed Portfolio will be disseminated Moreover the Intraday Indicative Value
Regular Market Session from 930 am to 4 pm or 415 pm Eastern Time and (3) Post-Market Session from 4 pm or 415 pm to 8 pm Eastern Time)
Under accounting procedures to be followed by the Fund trades made on the prior business day (ldquoTrdquo) will be booked and reflected in NAV on the current business day (ldquoT+1rdquo) Accordingly the Fund will be able to disclose at the beginning of the business day the portfolio that will form the basis for the NAV calculation at the end of the business day
35
SR-NASDAQ-2015-011 Amendment No 2 Page 20 of 64
available on the NASDAQ OMX Information LLC proprietary index data service36 will
be based upon the current value for the components of the Disclosed Portfolio and will be
updated and widely disseminated by one or more major market data vendors and broadly
displayed at least every 15 seconds during the Regular Market Session The Intraday
Indicative Value will be based on quotes and closing prices from the securitiesrsquo local
market and may not reflect events that occur subsequent to the local marketrsquos close
Premiums and discounts between the Intraday Indicative Value and the market price may
occur This should not be viewed as a ldquoreal timerdquo update of the NAV per Share of the
Fund which is calculated only once a day
The dissemination of the Intraday Indicative Value together with the Disclosed
Portfolio will allow investors to determine the value of the underlying portfolio of the
Fund on a daily basis and will provide a close estimate of that value throughout the
trading day
Investors will also be able to obtain the Fundrsquos Statement of Additional
Information (ldquoSAIrdquo) the Fundrsquos annual and semi-annual reports (together ldquoShareholder
Reportsrdquo) and its Form N-CSR and Form N-SAR filed twice a year The Fundrsquos SAI
and Shareholder Reports will be available free upon request from the Fund and those
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or
downloaded from the Commissionrsquos website at wwwsecgov Information regarding
market price and trading volume of the Shares will be continually available on a real-time
Currently the NASDAQ OMX Global Index Data Service (ldquoGIDSrdquo) is the NASDAQ OMX global index data feed service offering real-time updates daily summary messages and access to widely followed indexes and Intraday Indicative Values for ETFs GIDS provides investment professionals with the daily information needed to track or trade NASDAQ OMX indexes listed ETFs or third-party partner indexes and ETFs
36
SR-NASDAQ-2015-011 Amendment No 2 Page 21 of 64
basis throughout the day on brokersrsquo computer screens and other electronic services
Information regarding the previous dayrsquos closing price and trading volume information
for the Shares will be published daily in the financial section of newspapers Quotation
and last sale information for the Shares will be available via Nasdaq proprietary quote
and trade services as well as in accordance with the Unlisted Trading Privileges and the
Consolidated Tape Association (ldquoCTArdquo) plans for the Shares Quotation and last sale
information for the other ETFs in which the Fund will invest will be available via the
quote and trade services of their respective primary exchanges as well as in accordance
with the Unlisted Trading Privileges and the CTA plans as applicable Quotation and
last sale information for US exchange-traded options will be available via the Options
Price Reporting Authority Intraday executable price quotations on Floating Rate Debt
Instruments and other assets not traded on an exchange will be available from major
broker-dealer firms or market data vendors as well as from automated quotation systems
published or other public sources or online information services Additionally the Trade
Reporting and Compliance Engine (ldquoTRACErdquo) of the Financial Industry Regulatory
Authority (ldquoFINRArdquo) will be a source of price information for corporate bonds
privately-issued securities mortgage-backed securities and asset-backed securities to the
extent transactions in such securities are reported to TRACE37 For exchange-traded
assets intraday pricing information will be available directly from the applicable listing
exchange
Broker-dealers that are FINRA member firms have an obligation to report transactions in specified debt securities to TRACE to the extent required under applicable FINRA rules Generally such debt securities will have at issuance a maturity that exceeds one calendar year
37
SR-NASDAQ-2015-011 Amendment No 2 Page 22 of 64
Additional information regarding the Fund and the Shares including investment
strategies risks creation and redemption procedures fees Fund holdings disclosure
policies distributions and taxes will be included in the Registration Statement
Initial and Continued Listing
The Shares will be subject to Rule 5735 which sets forth the initial and continued
listing criteria applicable to Managed Fund Shares The Exchange represents that for
initial andor continued listing the Fund must be in compliance with Rule 10A-338 under
the Act A minimum of 100000 Shares will be outstanding at the commencement of
trading on the Exchange The Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the NAV and the
Disclosed Portfolio will be made available to all market participants at the same time
Trading Halts
With respect to trading halts the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading in the Shares of the Fund Nasdaq will
halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12) Trading may be
halted because of market conditions or for reasons that in the view of the Exchange
make trading in the Shares inadvisable These may include (1) the extent to which
trading is not occurring in the securities andor the other assets constituting the Disclosed
Portfolio of the Fund or (2) whether other unusual conditions or circumstances
detrimental to the maintenance of a fair and orderly market are present Trading in the
See 17 CFR 24010A-3 38
SR-NASDAQ-2015-011 Amendment No 2 Page 23 of 64
Shares also will be subject to Rule 5735(d)(2)(D) which sets forth circumstances under
which Shares of the Fund may be halted
Trading Rules
Nasdaq deems the Shares to be equity securities thus rendering trading in the
Shares subject to Nasdaqrsquos existing rules governing the trading of equity securities
Nasdaq will allow trading in the Shares from 400 am until 800 pm Eastern Time
The Exchange has appropriate rules to facilitate transactions in the Shares during all
trading sessions As provided in Nasdaq Rule 5735(b)(3) the minimum price variation
for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $001
Surveillance
The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws39 The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities laws
The surveillances referred to above generally focus on detecting securities trading
outside their normal patterns which could be indicative of manipulative or other violative
activity When such situations are detected surveillance analysis follows and
investigations are opened where appropriate to review the behavior of all relevant
parties for all relevant trading violations
FINRA surveils trading on the Exchange pursuant to a regulatory services agreement The Exchange is responsible for FINRArsquos performance under this regulatory services agreement
39
SR-NASDAQ-2015-011 Amendment No 2 Page 24 of 64
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 25 of 64
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
b Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
SR-NASDAQ-2015-011 Amendment No 2 Page 26 of 64
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
SR-NASDAQ-2015-011 Amendment No 2 Page 27 of 64
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
SR-NASDAQ-2015-011 Amendment No 2 Page 28 of 64
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
SR-NASDAQ-2015-011 Amendment No 2 Page 29 of 64
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
SR-NASDAQ-2015-011 Amendment No 2 Page 30 of 64
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
SR-NASDAQ-2015-011 Amendment No 2 Page 31 of 64
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
4 Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
5 Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received from Members Participants or Others
Written comments were neither solicited nor received
6 Extension of Time Period for Commission Action
The Exchange does not consent at this time to an extension of any time period for
Commission action
7 Basis for Summary Effectiveness Pursuant to Section 19(b)(3) or for Accelerated Effectiveness Pursuant to Section 19(b)(2)
Not applicable
8 Proposed Rule Change Based on Rules of Another Self-Regulatory Organization or of the Commission
Not applicable
9 Security-Based Swap Submissions Filed Pursuant to Section 3C of the Act
Not applicable
SR-NASDAQ-2015-011 Amendment No 2 Page 32 of 64
10 Advance Notices Filed Pursuant to Section 806(e) of the Payment Clearing and Settlement Supervision Act
Not applicable
11 Exhibits
1 Completed notice of proposed rule change for publication in the Federal
Register
SR-NASDAQ-2015-011 Amendment No 2 Page 33 of 64
EXHIBIT 1
SECURITIES AND EXCHANGE COMMISSION (Release No 34shy File No SR-NASDAQ-2015-011)
April __ 2015
Self-Regulatory Organizations The NASDAQ Stock Market LLC Notice of Filing of Proposed Rule Change Relating to the Listing and Trading of the Shares of the First Trust Strategic Floating Rate ETF of First Trust Exchange-Traded Fund IV
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (ldquoActrdquo)1 and
Rule 19b-4 thereunder2 notice is hereby given that on February 12 2015 The NASDAQ
Stock Market LLC (ldquoNasdaqrdquo or the ldquoExchangerdquo) filed with the Securities and Exchange
Commission (ldquoCommissionrdquo) the proposed rule change as described in in Items I II and
III below which Items have been prepared by Nasdaq On April 6 2015 Nasdaq filed
Amendment No 1 which replaced the text of the original filing in its entirety On April
15 2015 Nasdaq filed Amendment No 2 which replaced the text of the original filing in
its entirety The Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons
I Self-Regulatory Organizationrsquos Statement of the Terms of Substance of the Proposed Rule Change
Nasdaq proposes to list and trade the shares of the First Trust Strategic Floating
Rate ETF (the ldquoFundrdquo) of the First Trust Strategic Floating Rate ETF (the ldquoFundrdquo) of
First Trust Exchange-Traded Fund IV (the ldquoTrustrdquo) under Nasdaq Rule 5735 (ldquoManaged
1 15 USC 78s(b)(1)
2 17 CFR 24019b-4
SR-NASDAQ-2015-011 Amendment No 2 Page 34 of 64
Fund Sharesrdquo)3 The shares of the Fund are collectively referred to herein as the
ldquoSharesrdquo
The text of the proposed rule change is available at
httpnasdaqcchwallstreetcom at Nasdaqrsquos principal office and at the Commissionrsquos
Public Reference Room
II Self-Regulatory Organizationrsquos Statement of the Purpose of and Statutory Basis for the Proposed Rule Change
In its filing with the Commission Nasdaq included statements concerning the
purpose of and basis for the proposed rule change The text of these statements may be
examined at the places specified in Item IV below Nasdaq has prepared summaries set
forth in Sections A B and C below of the most significant aspects of such statements
A Self-Regulatory Organizationrsquos Statement of the Purpose of and Statutory Basis for the Proposed Rule Change
1 Purpose
The Exchange proposes to list and trade the Shares of the Fund under Nasdaq
Rule 5735 which governs the listing and trading of Managed Fund Shares4 on the
3 The Commission approved Nasdaq Rule 5735 in Securities Exchange Act Release No 57962 (June 13 2008) 73 FR 35175 (June 20 2008) (SR-NASDAQ-2008shy039) There are already multiple actively-managed funds listed on the Exchange see eg Securities Exchange Act Release Nos 69464 (April 26 2013) 78 FR 25774 (May 2 2013) (SR-NASDAQ-2013-036) (order approving listing and trading of First Trust Senior Loan Fund) 68972 (February 22 2013) 78 FR 13721 (February 28 2013) (SR-NASDAQ-2012-147) (order approving listing and trading of First Trust High Yield LongShort ETF) 66489 (February 29 2012) 77 FR 13379 (March 6 2012) (SR-NASDAQ-2012-004) (order approving listing and trading of WisdomTree Emerging Markets Corporate Bond Fund) The Exchange believes the proposed rule change raises no significant issues not previously addressed in those prior Commission orders
4 A Managed Fund Share is a security that represents an interest in an investment company registered under the Investment Company Act of 1940 (15 USC 80ashy
SR-NASDAQ-2015-011 Amendment No 2 Page 35 of 64
Exchange The Fund will be an actively-managed exchange-traded fund (ldquoETFrdquo) The
Shares will be offered by the Trust which was established as a Massachusetts business
trust on September 15 20105 The Trust is registered with the Commission as an
investment company and has filed a registration statement on Form N-1A (ldquoRegistration
Statementrdquo) with the Commission6 The Fund will be a series of the Trust The Fund
intends to qualify each year as a regulated investment company (ldquoRICrdquo) under
Subchapter M of the Internal Revenue Code of 1986 as amended
First Trust Advisors LP will be the investment adviser (ldquoAdviserrdquo) to the Fund
First Trust Portfolios LP (the ldquoDistributorrdquo) will be the principal underwriter and
distributor of the Fundrsquos Shares The Bank of New York Mellon Corporation (ldquoBNYrdquo)
will act as the administrator accounting agent custodian and transfer agent to the Fund
1) (the ldquo1940 Actrdquo) organized as an open-end investment company or similar entity that invests in a portfolio of securities selected by its investment adviser consistent with its investment objectives and policies In contrast an open-end investment company that issues Index Fund Shares listed and traded on the Exchange under Nasdaq Rule 5705 seeks to provide investment results that correspond generally to the price and yield performance of a specific foreign or domestic stock index fixed income securities index or combination thereof
5 The Commission has issued an order upon which the Trust may rely granting certain exemptive relief under the 1940 Act See Investment Company Act Release No 30029 (April 10 2012) (File No 812-13795) (the ldquoExemptive Reliefrdquo) In addition the Commission has issued no-action relief upon which the Trust may rely pertaining to the Fundrsquos ability to invest in derivatives notwithstanding certain representations in the application for the Exemptive Relief See Commission No-Action Letter (December 6 2012)
6 See Post-Effective Amendment No 104 to Registration Statement on Form N-1A for the Trust dated January 29 2015 (File Nos 333-174332 and 811-22559) The descriptions of the Fund and the Shares contained herein are based in part on information in the Registration Statement
7
SR-NASDAQ-2015-011 Amendment No 2 Page 36 of 64
Paragraph (g) of Rule 5735 provides that if the investment adviser to the
investment company issuing Managed Fund Shares is affiliated with a broker-dealer
such investment adviser shall erect a ldquofire wallrdquo between the investment adviser and the
broker-dealer with respect to access to information concerning the composition andor
changes to such investment company portfolio7 In addition paragraph (g) further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio Rule 5735(g) is similar
to Nasdaq Rule 5705(b)(5)(A)(i) however paragraph (g) in connection with the
establishment of a ldquofire wallrdquo between the investment adviser and the broker-dealer
reflects the applicable open-end fundrsquos portfolio not an underlying benchmark index as
is the case with index-based funds The Adviser is not a broker-dealer although it is
affiliated with the Distributor a broker-dealer The Adviser has implemented a fire wall
An investment adviser to an open-end fund is required to be registered under the Investment Advisers Act of 1940 (the ldquoAdvisers Actrdquo) As a result the Adviser and its related personnel are subject to the provisions of Rule 204A-1 under the Advisers Act relating to codes of ethics This Rule requires investment advisers to adopt a code of ethics that reflects the fiduciary nature of the relationship to clients as well as compliance with other applicable securities laws Accordingly procedures designed to prevent the communication and misuse of non-public information by an investment adviser must be consistent with Rule 204A-1 under the Advisers Act In addition Rule 206(4)-7 under the Advisers Act makes it unlawful for an investment adviser to provide investment advice to clients unless such investment adviser has (i) adopted and implemented written policies and procedures reasonably designed to prevent violation by the investment adviser and its supervised persons of the Advisers Act and the Commission rules adopted thereunder (ii) implemented at a minimum an annual review regarding the adequacy of the policies and procedures established pursuant to subparagraph (i) above and the effectiveness of their implementation and (iii) designated an individual (who is a supervised person) responsible for administering the policies and procedures adopted under subparagraph (i) above
8
SR-NASDAQ-2015-011 Amendment No 2 Page 37 of 64
with respect to its broker-dealer affiliate regarding access to information concerning the
composition andor changes to the portfolio In addition personnel who make decisions
on the Fundrsquos portfolio composition will be subject to procedures designed to prevent the
use and dissemination of material non-public information regarding the Fundrsquos portfolio
In the event (a) the Adviser becomes or becomes newly affiliated with a broker-dealer
or (b) any new adviser or sub-adviser is a registered broker-dealer or becomes affiliated
with another broker-dealer it will implement a fire wall with respect to its relevant
personnel andor such broker-dealer affiliate as applicable regarding access to
information concerning the composition andor changes to the portfolio and will be
subject to procedures designed to prevent the use and dissemination of material
non-public information regarding such portfolio The Fund does not currently intend to
use a sub-adviser
First Trust Strategic Floating Rate ETF
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions8 at least 80 of its
The term ldquounder normal market conditionsrdquo as used herein includes but is not limited to the absence of adverse market economic political or other conditions including extreme volatility or trading halts in the fixed income markets or the financial markets generally operational issues causing dissemination of inaccurate market information or force majeure type events such as systems failure natural or man-made disaster act of God armed conflict act of terrorism riot or labor disruption or any similar intervening circumstance For temporary defensive purposes during the initial invest-up period and during periods of high cash inflows or outflows the Fund may depart from its principal investment strategies for example it may hold a higher than normal proportion of its assets in cash During such periods the Fund may not be able to achieve its investment objective The Fund may adopt a defensive strategy when the Adviser believes securities in which the Fund normally invests have elevated risks due to political or economic factors and in other extraordinary circumstances
SR-NASDAQ-2015-011 Amendment No 2 Page 38 of 64
net assets in a portfolio of the following types of floating-rate9 debt instruments issued by
US and non-US public- and private-sector entities floating-rate corporate10 and
government bonds and notes floating-rate agency securities 11 floating-rate instruments
of non-US issuers floating-rate privately-issued securities 12 floating-rate asset-backed
securities 13 floating-rate mortgage-backed securities14 floating-rate loans 15 and
9 For the avoidance of doubt the term ldquofloating-raterdquo shall also include similar terms such as ldquovariable-raterdquo and ldquoadjustable-raterdquo
10 The Adviser expects that under normal market conditions generally for a corporate bond to be considered as an eligible investment after taking into account such an investment at least 75 of the Fundrsquos net assets that are invested in floating-rate corporate bonds and as described below fixed-rate corporate bonds (in the aggregate) will be comprised of corporate bonds that have at the time of original issuance $100 million or more par amount outstanding
11 ldquoAgency securitiesrdquo for these purposes generally includes securities issued by the following entities Government National Mortgage Association (Ginnie Mae) Federal National Mortgage Association (Fannie Mae) Federal Home Loan Banks (FHLBanks) Federal Home Loan Mortgage Corporation (Freddie Mac) Farm Credit System (FCS) Farm Credit Banks (FCBanks) Student Loan Marketing Association (Sallie Mae) Resolution Funding Corporation (REFCORP) Financing Corporation (FICO) and the Farm Credit System (FCS) Financial Assistance Corporation (FAC) Agency securities can include but are not limited to mortgage-backed securities
12 ldquoPrivately-issued securitiesrdquo for these purposes generally includes Rule 144A securities other than mortgage-backed Rule 144A securities Under normal market conditions privately-issued securities will have at the time of original issuance $100 million or more principal amount outstanding to be considered eligible investments
13 Asset-backed securities are securities that are backed by a pool of assets The Fund currently intends to invest in asset-backed securities that are consumer asset-backed securities
14 Mortgage-backed securities which are securities that directly or indirectly represent a participation in or are secured by and payable from mortgage loans on real property will consist of (1) residential mortgage-backed securities (ldquoRMBSrdquo) (2) commercial mortgage-backed securities (ldquoCMBSrdquo) (3) stripped mortgage-backed securities (ldquoSMBSrdquo) which are mortgage-backed securities
SR-NASDAQ-2015-011 Amendment No 2 Page 39 of 64
investment companies16 (including investment companies advised by the Adviser) that
invest primarily in the foregoing types of debt instruments17 (collectively ldquoFloating Rate
Debt Instrumentsrdquo)
where mortgage payments are divided between paying the loanrsquos principal and paying the loanrsquos interest (4) collateralized mortgage obligations (ldquoCMOsrdquo) and real estate mortgage investment conduits (ldquoREMICsrdquo) which are mortgage-backed securities that are divided into multiple classes with each class being entitled to a different share of the principal and interest payments received from the pool of underlying assets
15 The floating-rate loans in which the Fund will invest will represent amounts borrowed by companies or other entities from banks and other lenders and a significant portion of such floating-rate loans may be rated below investment grade or unrated Floating-rate loans held by the Fund may be senior or subordinate obligations of the borrower and may or may not be secured by collateral First lien senior secured floating-rate loans are referred to herein as ldquosenior loansrdquo Floating-rate loans that are not senior loans (ie unsecured floating-rate loans and secured floating-rate loans that are not first lien floating-rate loans) are referred to herein as ldquojunior loansrdquo The Fund will generally invest in floating-rate loans that the Adviser deems to be liquid with readily available prices notwithstanding the foregoing the Fund may invest in floating-rate loans that are deemed illiquid so long as the Fund complies with the 15 limitation on investments of its net assets in illiquid assets described below under ldquoInvestment Restrictionsrdquo
16 The Fund currently anticipates investing only in registered open-end investment companies that are listed and traded in the US on registered exchanges (ie other ETFs) An ETF is an investment company registered under the 1940 Act that holds a portfolio of securities Many ETFs are designed to track the performance of a securities index including industry sector country and region indexes The Fund may invest in the securities of ETFs in excess of the limits imposed under the 1940 Act pursuant to exemptive orders obtained by other ETFs and their sponsors from the Commission In addition the Fund may invest in the securities of certain investment companies in excess of the limits imposed under the 1940 Act pursuant to an exemptive order obtained by the Trust and the Adviser from the Commission See Investment Company Act Release No 30377 (February 5 2013) (File No 812-13895) The ETFs in which the Fund may invest include Index Fund Shares (as described in Nasdaq Rule 5705) Portfolio Depository Receipts (as described in Nasdaq Rule 5705) and Managed Fund Shares (as described in Nasdaq Rule 5735) While the Fund may invest in inverse ETFs the Fund will not invest in leveraged or inverse leveraged (eg 2X or -3X) ETFs
SR-NASDAQ-2015-011 Amendment No 2 Page 40 of 64
At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade To be considered
ldquoinvestment graderdquo under normal market conditions rated Floating Rate Debt
Instruments will carry at the time of purchase a rating in the highest four rating
categories of at least one nationally recognized statistical ratings organization
(ldquoNRSROrdquo) (eg BBB- or higher by Standard amp Poorrsquos Ratings Services (ldquoSampPrdquo)
andor Fitch Ratings (ldquoFitchrdquo) or Baa3 or higher by Moodyrsquos Investors Service Inc
(ldquoMoodyrsquosrdquo)18 For unrated securities to be considered ldquoinvestment graderdquo under normal
market conditions such securities will be determined at the time of purchase to be of
comparable quality19 by the Adviser The Fund may invest up to 35 of its net assets in
securities that are at the time of investment rated below investment grade by each
NRSRO rating such securities (or securities that are unrated and determined by the
17 The liquidity of a security especially in the case of asset-backed and mortgage-backed securities will be a substantial factor in the Fundrsquos security selection process Consistent with the discussion below under ldquoInvestment Restrictionsrdquo the Fund will not purchase any Floating Rate Debt Instruments (including asset-backed securities and mortgage-backed securities) that in the Adviserrsquos opinion are illiquid if as a result more than 15 of the value of the Fundrsquos net assets will be invested in illiquid assets
18 For the avoidance of doubt if a security is rated by multiple NRSROs and receives different ratings the Fund will treat the security as being rated in the highest rating category received from an NRSRO
19 Comparable quality of unrated securities will be determined by the Adviser based on fundamental credit analysis of the unrated security and comparable NRSRO-rated securities On a best efforts basis the Adviser will attempt to make a rating determination based on publicly available data In making a ldquocomparable qualityrdquo determination the Adviser may consider for example whether the issuer of the security has issued other rated securities the nature and provisions of the relevant security whether the obligations under the relevant security are guaranteed by another entity and the rating of such guarantor (if any) relevant cash flows macroeconomic analysis andor sector or industry analysis
SR-NASDAQ-2015-011 Amendment No 2 Page 41 of 64
Adviser to be of comparable quality) commonly referred to as ldquohigh yieldrdquo or ldquojunkrdquo
bonds If subsequent to purchase by the Fund a security held by the Fund experiences a
decline in credit quality and falls below investment grade the Fund may continue to hold
the security and it will not cause the Fund to violate the 35 investment limitation
however the security will be taken into account for purposes of determining whether
purchases of additional securities will cause the Fund to violate such limitation
The Fund will limit its investments in asset-backed securities (excluding agency
mortgage-backed securities) and non-agency mortgage-backed securities (in the
aggregate) to 20 of its net assets20 In addition the Fund will limit its investments in
junior loans to 20 of its net assets
The Fund will hold debt securities (including in the aggregate Floating Rate
Debt Instruments and the fixed-rate debt securities described below) of at least 13
non-affiliated issuers
Other Investments
Under normal market conditions the Fund will invest primarily in the Floating
Rate Debt Instruments described above to meet its investment objective In addition the
Fund may invest up to 20 of its net assets in the following types of fixed-rate debt
securities corporate21 and government bonds and notes agency securities22 instruments
20 For the avoidance of doubt there is no limitation on the Fundrsquos investments in agency mortgage-backed securities
21 See footnote 10 above
22 See footnote 11 above
SR-NASDAQ-2015-011 Amendment No 2 Page 42 of 64
of non-US issuers in developed markets privately-issued securities 23 asset-backed
securities 24 mortgage-backed securities 25 municipal bonds money market securities26
and investment companies27 (including investment companies advised by the Adviser)
that invest primarily in the foregoing types of debt securities
Further to pursue its investment objective the Fund may invest up to 20 of the
value of its net assets in exchange-listed options on US Treasury futures contracts and
exchange-listed US Treasury futures contracts28 The use of these derivative
transactions may allow the Fund to obtain net long or short exposures to selected interest
rates These derivatives may also be used to hedge risks including interest rate risks and
credit risks associated with the Fundrsquos portfolio investments The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
23 See footnote 12 above
24 See footnote 13 above
25 See footnote 14 above
26 ldquoMoney market securitiesrdquo for these purposes generally includes short-term high-quality obligations issued or guaranteed by the US Treasury or the agencies or instrumentalities of the US government short-term high-quality securities issued or guaranteed by non-US governments agencies and instrumentalities repurchase agreements commercial paper (both asset-backed and non-assetshybacked) and deposits and other obligations of US and non-US banks and financial institutions
27 See footnote 16 above
28 At least 90 of the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be invested in instruments that trade in markets that are members of the Intermarket Surveillance Group (ldquoISGrdquo) (see footnote 40 below) or are parties to a comprehensive surveillance sharing agreement with the Exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 43 of 64
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index
Investment Restrictions
The Fund will not invest 25 or more of the value of its total assets in securities
of issuers in any one industry This restriction does not apply to (a) obligations issued or
guaranteed by the US government its agencies or instrumentalities or (b) securities of
other investment companies29
The Fund may hold up to an aggregate amount of 15 of its net assets in illiquid
assets (calculated at the time of investment) including Rule 144A securities deemed
illiquid by the Adviser30 The Fund will monitor its portfolio liquidity on an ongoing
basis to determine whether in light of current circumstances an adequate level of
liquidity is being maintained and will consider taking appropriate steps in order to
maintain adequate liquidity if through a change in values net assets or other
circumstances more than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid
assets include securities subject to contractual or other restrictions on resale and other
29 See Form N-1A Item 9 The Commission has taken the position that a fund is concentrated if it invests more than 25 of the value of its total assets in any one industry See eg Investment Company Act Release No 9011 (October 30 1975) 40 FR 54241 (November 21 1975)
30 In reaching liquidity decisions the Adviser may consider the following factors the frequency of trades and quotes for the security the number of dealers wishing to purchase or sell the security and the number of other potential purchasers dealer undertakings to make a market in the security and the nature of the security and the nature of the marketplace in which it trades (eg the time needed to dispose of the security the method of soliciting offers and the mechanics of transfer)
SR-NASDAQ-2015-011 Amendment No 2 Page 44 of 64
instruments that lack readily available markets as determined in accordance with
Commission staff guidance31
The Fund will not invest in non-US equity securities
Creation and Redemption of Shares
The Fund will issue and redeem Shares on a continuous basis at net asset value
(ldquoNAVrdquo)32 only in large blocks of Shares (ldquoCreation Unitsrdquo) in transactions with
authorized participants generally including broker-dealers and large institutional
investors (ldquoAuthorized Participantsrdquo) Creation Units generally will consist of 50000
Shares although this may change from time to time Creation Units however are not
expected to consist of less than 50000 Shares As described in the Registration
Statement and consistent with the Exemptive Relief the Fund will issue and redeem
Creation Units in exchange for an in-kind portfolio of instruments andor cash in lieu of
31 The Commission has stated that long-standing Commission guidelines have required open-end funds to hold no more than 15 of their net assets in illiquid securities and other illiquid assets See Investment Company Act Release No 28193 (March 11 2008) 73 FR 14618 (March 18 2008) footnote 34 See also Investment Company Act Release No 5847 (October 21 1969) 35 FR 19989 (December 31 1970) (Statement Regarding ldquoRestricted Securitiesrdquo) Investment Company Act Release No 18612 (March 12 1992) 57 FR 9828 (March 20 1992) (Revisions of Guidelines to Form N-1A) A fundrsquos portfolio security is illiquid if it cannot be disposed of in the ordinary course of business within seven days at approximately the value ascribed to it by the fund See Investment Company Act Release No 14983 (March 12 1986) 51 FR 9773 (March 21 1986) (adopting amendments to Rule 2a-7 under the 1940 Act) Investment Company Act Release No 17452 (April 23 1990) 55 FR 17933 (April 30 1990) (adopting Rule 144A under the Securities Act of 1933)
32 The NAV of the Fundrsquos Shares generally will be calculated once daily Monday through Friday as of the close of regular trading on the New York Stock Exchange generally 400 pm Eastern Time (the ldquoNAV Calculation Timerdquo) NAV per Share will be calculated by dividing the Fundrsquos net assets by the number of Fund Shares outstanding For more information regarding the valuation of Fund investments in calculating the Fundrsquos NAV see the Registration Statement
SR-NASDAQ-2015-011 Amendment No 2 Page 45 of 64
such instruments (the ldquoCreation Basketrdquo) In addition if there is a difference between the
NAV attributable to a Creation Unit and the market value of the Creation Basket
exchanged for the Creation Unit the party conveying instruments with the lower value
will pay to the other an amount in cash equal to the difference (referred to as the ldquoCash
Componentrdquo)
Creations and redemptions must be made by or through an Authorized Participant
that has executed an agreement that has been agreed to by the Distributor and BNY with
respect to creations and redemptions of Creation Units All standard orders to create
Creation Units must be received by the transfer agent no later than the closing time of the
regular trading session on the New York Stock Exchange (ordinarily 400 pm Eastern
Time) (the ldquoClosing Timerdquo) in each case on the date such order is placed in order for the
creation of Creation Units to be effected based on the NAV of Shares as next determined
on such date after receipt of the order in proper form Shares may be redeemed only in
Creation Units at their NAV next determined after receipt not later than the Closing Time
of a redemption request in proper form by the Fund through the transfer agent and only
on a business day
The Fundrsquos custodian through the National Securities Clearing Corporation will
make available on each business day prior to the opening of business of the Exchange
the list of the names and quantities of the instruments comprising the Creation Basket as
well as the estimated Cash Component (if any) for that day The published Creation
Basket will apply until a new Creation Basket is announced on the following business
day prior to commencement of trading in the Shares
SR-NASDAQ-2015-011 Amendment No 2 Page 46 of 64
Net Asset Value
The Fundrsquos NAV will be determined as of the close of trading (normally
400 pm Eastern Time) on each day the New York Stock Exchange is open for
business NAV will be calculated for the Fund by taking the market price of the Fundrsquos
total assets including interest or dividends accrued but not yet collected less all
liabilities and dividing such amount by the total number of Shares outstanding The
result rounded to the nearest cent will be the NAV per Share All valuations will be
subject to review by the Board of Trustees of the Trust (ldquoTrust Boardrdquo) or its delegate
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with valuation procedures (which may be revised from time to time) adopted by the Trust
Board (the ldquoValuation Proceduresrdquo) and in accordance with the 1940 Act A market
valuation generally means a valuation (i) obtained from an exchange an independent
pricing service (ldquoPricing Servicerdquo) or a major market maker (or dealer) or (ii) based on a
price quotation or other equivalent indication of value supplied by an exchange a Pricing
Service or a major market maker (or dealer) The information summarized below is
based on the Valuation Procedures as currently in effect however as noted above the
Valuation Procedures are amended from time to time and therefore such information is
subject to change
Certain securities including Floating Rate Debt Instruments in which the Fund
may invest will not be listed on any securities exchange or board of trade Such
securities will typically be bought and sold by institutional investors in individually
negotiated private transactions that function in many respects like an over-the-counter
SR-NASDAQ-2015-011 Amendment No 2 Page 47 of 64
secondary market although typically no formal market makers will exist Certain
securities particularly debt securities will have few or no trades or trade infrequently
and information regarding a specific security may not be widely available or may be
incomplete Accordingly determinations of the fair value of debt securities may be
based on infrequent and dated information Because there is less reliable objective data
available elements of judgment may play a greater role in valuation of debt securities
than for other types of securities Typically Floating Rate Debt Instruments and other
debt securities in which the Fund may invest (other than those described below) will be
valued using information provided by a Pricing Service Debt securities having a
remaining maturity of 60 days or less when purchased will be valued at cost adjusted for
amortization of premiums and accretion of discounts provided the Adviserrsquos pricing
committee (the ldquoPricing Committeerdquo) has determined that the use of amortized cost is an
appropriate reflection of fair value given market and issuer-specific conditions existing at
the time of the determination Overnight repurchase agreements will be valued at cost
and term repurchase agreements (ie those whose maturity exceeds seven days) will be
valued at the average of the bid quotations obtained daily from at least two recognized
dealers
Asset-backed and mortgage-backed securities will generally be valued by using a
Pricing Service If a Pricing Service does not cover a particular asset-backed or
mortgage-backed security or discontinues covering a particular asset-backed or
mortgage-backed security the security will be priced using broker quotes generally
provided by brokers that make or participate in markets in the security To derive values
Pricing Services and broker-dealers may use matrix pricing and valuation models as well
SR-NASDAQ-2015-011 Amendment No 2 Page 48 of 64
as recent market transactions for the same or similar assets As it deems appropriate the
Pricing Committee may determine that a Pricing Service price does not represent an
accurate value of an asset-backed or mortgage-backed security based on broker quotes it
receives a recent trade in the security by the Fund information from a portfolio manager
or other market information In the event that the Pricing Committee determines that the
Pricing Service price is unreliable or inaccurate based on such other information broker
quotes may be used Additionally if the Pricing Committee determines that the price of
an asset-backed or mortgage-backed security obtained from a Pricing Service and
available broker quotes is unreliable or inaccurate due to market conditions or other
reasons or if a Pricing Service price or broker quote is unavailable the security will be
valued using fair value pricing as described below
Equity securities listed on any exchange other than the Exchange will be valued at
the last sale price on the exchange on which they are principally traded on the business
day as of which such value is being determined Equity securities listed on the Exchange
will be valued at the official closing price on the business day as of which such value is
being determined If there has been no sale on such day or no official closing price in
the case of securities traded on the Exchange the securities will be valued using fair
value pricing as described below Equity securities traded on more than one securities
exchange will be valued at the last sale price or official closing price as applicable on
the business day as of which such value is being determined at the close of the exchange
representing the principal market for such securities
Exchange-traded options and futures contracts will be valued at the closing price
in the market where such contracts are principally traded
SR-NASDAQ-2015-011 Amendment No 2 Page 49 of 64
Certain securities including Floating Rate Debt Instruments in which the Fund
will invest will not be able to be priced by pre-established pricing methods Such
securities may be valued by the Trust Board or its delegate at fair value The use of fair
value pricing by the Fund will be governed by the Valuation Procedures and conducted in
accordance with the provisions of the 1940 Act Valuing the Fundrsquos securities using fair
value pricing will result in using prices for those securities that may differ from current
market valuations or official closing prices on the applicable exchange
Availability of Information
The Fundrsquos website (wwwftportfolioscom) which will be publicly available
prior to the public offering of Shares will include a form of the prospectus for the Fund
that may be downloaded The website will include the Sharesrsquo ticker CUSIP and
exchange information along with additional quantitative information updated on a daily
basis including for the Fund (1) daily trading volume the prior business dayrsquos reported
NAV and closing price mid-point of the bidask spread at the time of calculation of such
NAV (the ldquoBidAsk Pricerdquo)33 and a calculation of the premium and discount of the
BidAsk Price against the NAV and (2) data in chart format displaying the frequency
distribution of discounts and premiums of the daily BidAsk Price against the NAV
within appropriate ranges for each of the four previous calendar quarters On each
business day before commencement of trading in Shares in the Regular Market Session34
33 The BidAsk Price of the Fund will be determined using the mid-point of the highest bid and the lowest offer on the Exchange as of the time of calculation of the Fundrsquos NAV The records relating to BidAsk Prices will be retained by the Fund and its service providers
34 See Nasdaq Rule 4120(b)(4) (describing the three trading sessions on the Exchange (1) Pre-Market Session from 4 am to 930 am Eastern Time (2)
SR-NASDAQ-2015-011 Amendment No 2 Page 50 of 64
on the Exchange the Fund will disclose on its website the identities and quantities of the
portfolio of securities and other assets (the ldquoDisclosed Portfoliordquo as defined in Nasdaq
Rule 5735(c)(2)) held by the Fund that will form the basis for the Fundrsquos calculation of
NAV at the end of the business day 35 The Fundrsquos disclosure of derivative positions in
the Disclosed Portfolio will include information that market participants can use to value
these positions intraday On a daily basis the Fund will disclose on the Fundrsquos website
the following information regarding each portfolio holding as applicable to the type of
holding ticker symbol CUSIP number or other identifier if any a description of the
holding (including the type of holding) the identity of the security or other asset or
instrument underlying the holding if any for options the option strike price quantity
held (as measured by for example par value notional value or number of shares
contracts or units) maturity date if any coupon rate if any effective date if any market
value of the holding and percentage weighting of the holding in the Fundrsquos portfolio
The website information will be publicly available at no charge
In addition for the Fund an estimated value defined in Rule 5735(c)(3) as the
ldquoIntraday Indicative Valuerdquo that reflects an estimated intraday value of the Fundrsquos
Disclosed Portfolio will be disseminated Moreover the Intraday Indicative Value
Regular Market Session from 930 am to 4 pm or 415 pm Eastern Time and (3) Post-Market Session from 4 pm or 415 pm to 8 pm Eastern Time)
Under accounting procedures to be followed by the Fund trades made on the prior business day (ldquoTrdquo) will be booked and reflected in NAV on the current business day (ldquoT+1rdquo) Accordingly the Fund will be able to disclose at the beginning of the business day the portfolio that will form the basis for the NAV calculation at the end of the business day
35
SR-NASDAQ-2015-011 Amendment No 2 Page 51 of 64
available on the NASDAQ OMX Information LLC proprietary index data service36 will
be based upon the current value for the components of the Disclosed Portfolio and will be
updated and widely disseminated by one or more major market data vendors and broadly
displayed at least every 15 seconds during the Regular Market Session The Intraday
Indicative Value will be based on quotes and closing prices from the securitiesrsquo local
market and may not reflect events that occur subsequent to the local marketrsquos close
Premiums and discounts between the Intraday Indicative Value and the market price may
occur This should not be viewed as a ldquoreal timerdquo update of the NAV per Share of the
Fund which is calculated only once a day
The dissemination of the Intraday Indicative Value together with the Disclosed
Portfolio will allow investors to determine the value of the underlying portfolio of the
Fund on a daily basis and will provide a close estimate of that value throughout the
trading day
Investors will also be able to obtain the Fundrsquos Statement of Additional
Information (ldquoSAIrdquo) the Fundrsquos annual and semi-annual reports (together ldquoShareholder
Reportsrdquo) and its Form N-CSR and Form N-SAR filed twice a year The Fundrsquos SAI
and Shareholder Reports will be available free upon request from the Fund and those
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or
downloaded from the Commissionrsquos website at wwwsecgov Information regarding
Currently the NASDAQ OMX Global Index Data Service (ldquoGIDSrdquo) is the NASDAQ OMX global index data feed service offering real-time updates daily summary messages and access to widely followed indexes and Intraday Indicative Values for ETFs GIDS provides investment professionals with the daily information needed to track or trade NASDAQ OMX indexes listed ETFs or third-party partner indexes and ETFs
36
SR-NASDAQ-2015-011 Amendment No 2 Page 52 of 64
market price and trading volume of the Shares will be continually available on a real-time
basis throughout the day on brokersrsquo computer screens and other electronic services
Information regarding the previous dayrsquos closing price and trading volume information
for the Shares will be published daily in the financial section of newspapers Quotation
and last sale information for the Shares will be available via Nasdaq proprietary quote
and trade services as well as in accordance with the Unlisted Trading Privileges and the
Consolidated Tape Association (ldquoCTArdquo) plans for the Shares Quotation and last sale
information for the other ETFs in which the Fund will invest will be available via the
quote and trade services of their respective primary exchanges as well as in accordance
with the Unlisted Trading Privileges and the CTA plans as applicable Quotation and
last sale information for US exchange-traded options will be available via the Options
Price Reporting Authority Intraday executable price quotations on Floating Rate Debt
Instruments and other assets not traded on an exchange will be available from major
broker-dealer firms or market data vendors as well as from automated quotation systems
published or other public sources or online information services Additionally the Trade
Reporting and Compliance Engine (ldquoTRACErdquo) of the Financial Industry Regulatory
Authority (ldquoFINRArdquo) will be a source of price information for corporate bonds
privately-issued securities mortgage-backed securities and asset-backed securities to the
extent transactions in such securities are reported to TRACE37 For exchange-traded
Broker-dealers that are FINRA member firms have an obligation to report transactions in specified debt securities to TRACE to the extent required under applicable FINRA rules Generally such debt securities will have at issuance a maturity that exceeds one calendar year
37
SR-NASDAQ-2015-011 Amendment No 2 Page 53 of 64
assets intraday pricing information will be available directly from the applicable listing
exchange
Additional information regarding the Fund and the Shares including investment
strategies risks creation and redemption procedures fees Fund holdings disclosure
policies distributions and taxes will be included in the Registration Statement
Initial and Continued Listing
The Shares will be subject to Rule 5735 which sets forth the initial and continued
listing criteria applicable to Managed Fund Shares The Exchange represents that for
initial andor continued listing the Fund must be in compliance with Rule 10A-338 under
the Act A minimum of 100000 Shares will be outstanding at the commencement of
trading on the Exchange The Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the NAV and the
Disclosed Portfolio will be made available to all market participants at the same time
Trading Halts
With respect to trading halts the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading in the Shares of the Fund Nasdaq will
halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12) Trading may be
halted because of market conditions or for reasons that in the view of the Exchange
make trading in the Shares inadvisable These may include (1) the extent to which
trading is not occurring in the securities andor the other assets constituting the Disclosed
Portfolio of the Fund or (2) whether other unusual conditions or circumstances
See 17 CFR 24010A-3 38
SR-NASDAQ-2015-011 Amendment No 2 Page 54 of 64
detrimental to the maintenance of a fair and orderly market are present Trading in the
Shares also will be subject to Rule 5735(d)(2)(D) which sets forth circumstances under
which Shares of the Fund may be halted
Trading Rules
Nasdaq deems the Shares to be equity securities thus rendering trading in the
Shares subject to Nasdaqrsquos existing rules governing the trading of equity securities
Nasdaq will allow trading in the Shares from 400 am until 800 pm Eastern Time
The Exchange has appropriate rules to facilitate transactions in the Shares during all
trading sessions As provided in Nasdaq Rule 5735(b)(3) the minimum price variation
for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $001
Surveillance
The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws39 The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities laws
The surveillances referred to above generally focus on detecting securities trading
outside their normal patterns which could be indicative of manipulative or other violative
activity When such situations are detected surveillance analysis follows and
FINRA surveils trading on the Exchange pursuant to a regulatory services agreement The Exchange is responsible for FINRArsquos performance under this regulatory services agreement
39
SR-NASDAQ-2015-011 Amendment No 2 Page 55 of 64
investigations are opened where appropriate to review the behavior of all relevant
parties for all relevant trading violations
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 56 of 64
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
SR-NASDAQ-2015-011 Amendment No 2 Page 57 of 64
2 Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
SR-NASDAQ-2015-011 Amendment No 2 Page 58 of 64
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
SR-NASDAQ-2015-011 Amendment No 2 Page 59 of 64
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
SR-NASDAQ-2015-011 Amendment No 2 Page 60 of 64
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 61 of 64
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
SR-NASDAQ-2015-011 Amendment No 2 Page 62 of 64
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
B Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
C Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received From Members Participants or Others
Written comments were neither solicited nor received
III Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Within 45 days of the date of publication of this notice in the Federal Register or
within such longer period (i) as the Commission may designate up to 90 days of such date
if it finds such longer period to be appropriate and publishes its reasons for so finding or
(ii) as to which the Exchange consents the Commission shall (a) by order approve or
disapprove such proposed rule change or (b) institute proceedings to determine whether
the proposed rule change should be disapproved
SR-NASDAQ-2015-011 Amendment No 2 Page 63 of 64
IV Solicitation of Comments
Interested persons are invited to submit written data views and arguments
concerning the foregoing including whether the proposed rule change is consistent with
the Act Comments may be submitted by any of the following methods
Electronic comments
bull Use the Commissionrsquos Internet comment form
(httpwwwsecgovrulessroshtml) or
bull Send an e-mail to rule-commentssecgov Please include File Number
SR-NASDAQ-2015-011 on the subject line
Paper comments
bull Send paper comments in triplicate to Brent J Fields Secretary Securities and
Exchange Commission Station Place 100 F Street NE Washington DC
20549-9303
All submissions should refer to File Number SR-NASDAQ-2015-011 This file number
should be included on the subject line if e-mail is used To help the Commission process
and review your comments more efficiently please use only one method The
Commission will post all comments on the Commissionrsquos Internet website
httpwwwsecgovrulessroshtml
Copies of the submission all subsequent amendments all written statements with
respect to the proposed rule change that are filed with the Commission and all written
communications relating to the proposed rule change between the Commission and any
person other than those that may be withheld from the public in accordance with the
provisions of 5 USC 552 will be available for website viewing and printing in the
Commissionrsquos Public Reference Room 100 F Street NE Washington DC 20549 on
SR-NASDAQ-2015-011 Amendment No 2 Page 64 of 64
official business days between the hours of 1000 am and 300 pm Copies of the filing
also will be available for inspection and copying at the principal office of Nasdaq All
comments received will be posted without change the Commission does not edit
personal identifying information from submissions You should submit only information
that you wish to make available publicly
All submissions should refer to File Number SR-NASDAQ-2015-011 and should
be submitted on or before [insert date 21 days from publication in the Federal Register]
For the Commission by the Division of Trading and Markets pursuant to
delegated authority41
Kevin M OrsquoNeill Deputy Secretary
17 CFR 20030-3(a)(12) 41
SR-NASDAQ-2015-011 Amendment No 2 Page 11 of 64
Fund may invest up to 20 of its net assets in the following types of fixed-rate debt
securities corporate21 and government bonds and notes agency securities22 instruments
of non-US issuers in developed markets privately-issued securities 23 asset-backed
securities 24 mortgage-backed securities 25 municipal bonds money market securities26
and investment companies27 (including investment companies advised by the Adviser)
that invest primarily in the foregoing types of debt securities
Further to pursue its investment objective the Fund may invest up to 20 of the
value of its net assets in exchange-listed options on US Treasury futures contracts and
exchange-listed US Treasury futures contracts28 The use of these derivative
transactions may allow the Fund to obtain net long or short exposures to selected interest
rates These derivatives may also be used to hedge risks including interest rate risks and
21 See footnote 10 above
22 See footnote 11 above
23 See footnote 12 above
24 See footnote 13 above
25 See footnote 14 above
26 ldquoMoney market securitiesrdquo for these purposes generally includes short-term high-quality obligations issued or guaranteed by the US Treasury or the agencies or instrumentalities of the US government short-term high-quality securities issued or guaranteed by non-US governments agencies and instrumentalities repurchase agreements commercial paper (both asset-backed and non-assetshybacked) and deposits and other obligations of US and non-US banks and financial institutions
27 See footnote 16 above
28 At least 90 of the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be invested in instruments that trade in markets that are members of the Intermarket Surveillance Group (ldquoISGrdquo) (see footnote 40 below) or are parties to a comprehensive surveillance sharing agreement with the Exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 12 of 64
credit risks associated with the Fundrsquos portfolio investments The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index
Investment Restrictions
The Fund will not invest 25 or more of the value of its total assets in securities
of issuers in any one industry This restriction does not apply to (a) obligations issued or
guaranteed by the US government its agencies or instrumentalities or (b) securities of
other investment companies29
The Fund may hold up to an aggregate amount of 15 of its net assets in illiquid
assets (calculated at the time of investment) including Rule 144A securities deemed
illiquid by the Adviser30 The Fund will monitor its portfolio liquidity on an ongoing
basis to determine whether in light of current circumstances an adequate level of
liquidity is being maintained and will consider taking appropriate steps in order to
maintain adequate liquidity if through a change in values net assets or other
circumstances more than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid
assets include securities subject to contractual or other restrictions on resale and other
29 See Form N-1A Item 9 The Commission has taken the position that a fund is concentrated if it invests more than 25 of the value of its total assets in any one industry See eg Investment Company Act Release No 9011 (October 30 1975) 40 FR 54241 (November 21 1975)
30 In reaching liquidity decisions the Adviser may consider the following factors the frequency of trades and quotes for the security the number of dealers wishing to purchase or sell the security and the number of other potential purchasers dealer undertakings to make a market in the security and the nature of the security and the nature of the marketplace in which it trades (eg the time needed to dispose of the security the method of soliciting offers and the mechanics of transfer)
SR-NASDAQ-2015-011 Amendment No 2 Page 13 of 64
instruments that lack readily available markets as determined in accordance with
Commission staff guidance31
The Fund will not invest in non-US equity securities
Creation and Redemption of Shares
The Fund will issue and redeem Shares on a continuous basis at net asset value
(ldquoNAVrdquo)32 only in large blocks of Shares (ldquoCreation Unitsrdquo) in transactions with
authorized participants generally including broker-dealers and large institutional
investors (ldquoAuthorized Participantsrdquo) Creation Units generally will consist of 50000
Shares although this may change from time to time Creation Units however are not
expected to consist of less than 50000 Shares As described in the Registration
Statement and consistent with the Exemptive Relief the Fund will issue and redeem
Creation Units in exchange for an in-kind portfolio of instruments andor cash in lieu of
31 The Commission has stated that long-standing Commission guidelines have required open-end funds to hold no more than 15 of their net assets in illiquid securities and other illiquid assets See Investment Company Act Release No 28193 (March 11 2008) 73 FR 14618 (March 18 2008) footnote 34 See also Investment Company Act Release No 5847 (October 21 1969) 35 FR 19989 (December 31 1970) (Statement Regarding ldquoRestricted Securitiesrdquo) Investment Company Act Release No 18612 (March 12 1992) 57 FR 9828 (March 20 1992) (Revisions of Guidelines to Form N-1A) A fundrsquos portfolio security is illiquid if it cannot be disposed of in the ordinary course of business within seven days at approximately the value ascribed to it by the fund See Investment Company Act Release No 14983 (March 12 1986) 51 FR 9773 (March 21 1986) (adopting amendments to Rule 2a-7 under the 1940 Act) Investment Company Act Release No 17452 (April 23 1990) 55 FR 17933 (April 30 1990) (adopting Rule 144A under the Securities Act of 1933)
32 The NAV of the Fundrsquos Shares generally will be calculated once daily Monday through Friday as of the close of regular trading on the New York Stock Exchange generally 400 pm Eastern Time (the ldquoNAV Calculation Timerdquo) NAV per Share will be calculated by dividing the Fundrsquos net assets by the number of Fund Shares outstanding For more information regarding the valuation of Fund investments in calculating the Fundrsquos NAV see the Registration Statement
SR-NASDAQ-2015-011 Amendment No 2 Page 14 of 64
such instruments (the ldquoCreation Basketrdquo) In addition if there is a difference between the
NAV attributable to a Creation Unit and the market value of the Creation Basket
exchanged for the Creation Unit the party conveying instruments with the lower value
will pay to the other an amount in cash equal to the difference (referred to as the ldquoCash
Componentrdquo)
Creations and redemptions must be made by or through an Authorized Participant
that has executed an agreement that has been agreed to by the Distributor and BNY with
respect to creations and redemptions of Creation Units All standard orders to create
Creation Units must be received by the transfer agent no later than the closing time of the
regular trading session on the New York Stock Exchange (ordinarily 400 pm Eastern
Time) (the ldquoClosing Timerdquo) in each case on the date such order is placed in order for the
creation of Creation Units to be effected based on the NAV of Shares as next determined
on such date after receipt of the order in proper form Shares may be redeemed only in
Creation Units at their NAV next determined after receipt not later than the Closing Time
of a redemption request in proper form by the Fund through the transfer agent and only
on a business day
The Fundrsquos custodian through the National Securities Clearing Corporation will
make available on each business day prior to the opening of business of the Exchange
the list of the names and quantities of the instruments comprising the Creation Basket as
well as the estimated Cash Component (if any) for that day The published Creation
Basket will apply until a new Creation Basket is announced on the following business
day prior to commencement of trading in the Shares
SR-NASDAQ-2015-011 Amendment No 2 Page 15 of 64
Net Asset Value
The Fundrsquos NAV will be determined as of the close of trading (normally
400 pm Eastern Time) on each day the New York Stock Exchange is open for
business NAV will be calculated for the Fund by taking the market price of the Fundrsquos
total assets including interest or dividends accrued but not yet collected less all
liabilities and dividing such amount by the total number of Shares outstanding The
result rounded to the nearest cent will be the NAV per Share All valuations will be
subject to review by the Board of Trustees of the Trust (ldquoTrust Boardrdquo) or its delegate
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with valuation procedures (which may be revised from time to time) adopted by the Trust
Board (the ldquoValuation Proceduresrdquo) and in accordance with the 1940 Act A market
valuation generally means a valuation (i) obtained from an exchange an independent
pricing service (ldquoPricing Servicerdquo) or a major market maker (or dealer) or (ii) based on a
price quotation or other equivalent indication of value supplied by an exchange a Pricing
Service or a major market maker (or dealer) The information summarized below is
based on the Valuation Procedures as currently in effect however as noted above the
Valuation Procedures are amended from time to time and therefore such information is
subject to change
Certain securities including Floating Rate Debt Instruments in which the Fund
may invest will not be listed on any securities exchange or board of trade Such
securities will typically be bought and sold by institutional investors in individually
negotiated private transactions that function in many respects like an over-the-counter
SR-NASDAQ-2015-011 Amendment No 2 Page 16 of 64
secondary market although typically no formal market makers will exist Certain
securities particularly debt securities will have few or no trades or trade infrequently
and information regarding a specific security may not be widely available or may be
incomplete Accordingly determinations of the fair value of debt securities may be
based on infrequent and dated information Because there is less reliable objective data
available elements of judgment may play a greater role in valuation of debt securities
than for other types of securities Typically Floating Rate Debt Instruments and other
debt securities in which the Fund may invest (other than those described below) will be
valued using information provided by a Pricing Service Debt securities having a
remaining maturity of 60 days or less when purchased will be valued at cost adjusted for
amortization of premiums and accretion of discounts provided the Adviserrsquos pricing
committee (the ldquoPricing Committeerdquo) has determined that the use of amortized cost is an
appropriate reflection of fair value given market and issuer-specific conditions existing at
the time of the determination Overnight repurchase agreements will be valued at cost
and term repurchase agreements (ie those whose maturity exceeds seven days) will be
valued at the average of the bid quotations obtained daily from at least two recognized
dealers
Asset-backed and mortgage-backed securities will generally be valued by using a
Pricing Service If a Pricing Service does not cover a particular asset-backed or
mortgage-backed security or discontinues covering a particular asset-backed or
mortgage-backed security the security will be priced using broker quotes generally
provided by brokers that make or participate in markets in the security To derive values
Pricing Services and broker-dealers may use matrix pricing and valuation models as well
SR-NASDAQ-2015-011 Amendment No 2 Page 17 of 64
as recent market transactions for the same or similar assets As it deems appropriate the
Pricing Committee may determine that a Pricing Service price does not represent an
accurate value of an asset-backed or mortgage-backed security based on broker quotes it
receives a recent trade in the security by the Fund information from a portfolio manager
or other market information In the event that the Pricing Committee determines that the
Pricing Service price is unreliable or inaccurate based on such other information broker
quotes may be used Additionally if the Pricing Committee determines that the price of
an asset-backed or mortgage-backed security obtained from a Pricing Service and
available broker quotes is unreliable or inaccurate due to market conditions or other
reasons or if a Pricing Service price or broker quote is unavailable the security will be
valued using fair value pricing as described below
Equity securities listed on any exchange other than the Exchange will be valued at
the last sale price on the exchange on which they are principally traded on the business
day as of which such value is being determined Equity securities listed on the Exchange
will be valued at the official closing price on the business day as of which such value is
being determined If there has been no sale on such day or no official closing price in
the case of securities traded on the Exchange the securities will be valued using fair
value pricing as described below Equity securities traded on more than one securities
exchange will be valued at the last sale price or official closing price as applicable on
the business day as of which such value is being determined at the close of the exchange
representing the principal market for such securities
Exchange-traded options and futures contracts will be valued at the closing price
in the market where such contracts are principally traded
SR-NASDAQ-2015-011 Amendment No 2 Page 18 of 64
Certain securities including Floating Rate Debt Instruments in which the Fund
will invest will not be able to be priced by pre-established pricing methods Such
securities may be valued by the Trust Board or its delegate at fair value The use of fair
value pricing by the Fund will be governed by the Valuation Procedures and conducted in
accordance with the provisions of the 1940 Act Valuing the Fundrsquos securities using fair
value pricing will result in using prices for those securities that may differ from current
market valuations or official closing prices on the applicable exchange
Availability of Information
The Fundrsquos website (wwwftportfolioscom) which will be publicly available
prior to the public offering of Shares will include a form of the prospectus for the Fund
that may be downloaded The website will include the Sharesrsquo ticker CUSIP and
exchange information along with additional quantitative information updated on a daily
basis including for the Fund (1) daily trading volume the prior business dayrsquos reported
NAV and closing price mid-point of the bidask spread at the time of calculation of such
NAV (the ldquoBidAsk Pricerdquo)33 and a calculation of the premium and discount of the
BidAsk Price against the NAV and (2) data in chart format displaying the frequency
distribution of discounts and premiums of the daily BidAsk Price against the NAV
within appropriate ranges for each of the four previous calendar quarters On each
business day before commencement of trading in Shares in the Regular Market Session34
33 The BidAsk Price of the Fund will be determined using the mid-point of the highest bid and the lowest offer on the Exchange as of the time of calculation of the Fundrsquos NAV The records relating to BidAsk Prices will be retained by the Fund and its service providers
34 See Nasdaq Rule 4120(b)(4) (describing the three trading sessions on the Exchange (1) Pre-Market Session from 4 am to 930 am Eastern Time (2)
SR-NASDAQ-2015-011 Amendment No 2 Page 19 of 64
on the Exchange the Fund will disclose on its website the identities and quantities of the
portfolio of securities and other assets (the ldquoDisclosed Portfoliordquo as defined in Nasdaq
Rule 5735(c)(2)) held by the Fund that will form the basis for the Fundrsquos calculation of
NAV at the end of the business day 35 The Fundrsquos disclosure of derivative positions in
the Disclosed Portfolio will include information that market participants can use to value
these positions intraday On a daily basis the Fund will disclose on the Fundrsquos website
the following information regarding each portfolio holding as applicable to the type of
holding ticker symbol CUSIP number or other identifier if any a description of the
holding (including the type of holding) the identity of the security or other asset or
instrument underlying the holding if any for options the option strike price quantity
held (as measured by for example par value notional value or number of shares
contracts or units) maturity date if any coupon rate if any effective date if any market
value of the holding and percentage weighting of the holding in the Fundrsquos portfolio
The website information will be publicly available at no charge
In addition for the Fund an estimated value defined in Rule 5735(c)(3) as the
ldquoIntraday Indicative Valuerdquo that reflects an estimated intraday value of the Fundrsquos
Disclosed Portfolio will be disseminated Moreover the Intraday Indicative Value
Regular Market Session from 930 am to 4 pm or 415 pm Eastern Time and (3) Post-Market Session from 4 pm or 415 pm to 8 pm Eastern Time)
Under accounting procedures to be followed by the Fund trades made on the prior business day (ldquoTrdquo) will be booked and reflected in NAV on the current business day (ldquoT+1rdquo) Accordingly the Fund will be able to disclose at the beginning of the business day the portfolio that will form the basis for the NAV calculation at the end of the business day
35
SR-NASDAQ-2015-011 Amendment No 2 Page 20 of 64
available on the NASDAQ OMX Information LLC proprietary index data service36 will
be based upon the current value for the components of the Disclosed Portfolio and will be
updated and widely disseminated by one or more major market data vendors and broadly
displayed at least every 15 seconds during the Regular Market Session The Intraday
Indicative Value will be based on quotes and closing prices from the securitiesrsquo local
market and may not reflect events that occur subsequent to the local marketrsquos close
Premiums and discounts between the Intraday Indicative Value and the market price may
occur This should not be viewed as a ldquoreal timerdquo update of the NAV per Share of the
Fund which is calculated only once a day
The dissemination of the Intraday Indicative Value together with the Disclosed
Portfolio will allow investors to determine the value of the underlying portfolio of the
Fund on a daily basis and will provide a close estimate of that value throughout the
trading day
Investors will also be able to obtain the Fundrsquos Statement of Additional
Information (ldquoSAIrdquo) the Fundrsquos annual and semi-annual reports (together ldquoShareholder
Reportsrdquo) and its Form N-CSR and Form N-SAR filed twice a year The Fundrsquos SAI
and Shareholder Reports will be available free upon request from the Fund and those
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or
downloaded from the Commissionrsquos website at wwwsecgov Information regarding
market price and trading volume of the Shares will be continually available on a real-time
Currently the NASDAQ OMX Global Index Data Service (ldquoGIDSrdquo) is the NASDAQ OMX global index data feed service offering real-time updates daily summary messages and access to widely followed indexes and Intraday Indicative Values for ETFs GIDS provides investment professionals with the daily information needed to track or trade NASDAQ OMX indexes listed ETFs or third-party partner indexes and ETFs
36
SR-NASDAQ-2015-011 Amendment No 2 Page 21 of 64
basis throughout the day on brokersrsquo computer screens and other electronic services
Information regarding the previous dayrsquos closing price and trading volume information
for the Shares will be published daily in the financial section of newspapers Quotation
and last sale information for the Shares will be available via Nasdaq proprietary quote
and trade services as well as in accordance with the Unlisted Trading Privileges and the
Consolidated Tape Association (ldquoCTArdquo) plans for the Shares Quotation and last sale
information for the other ETFs in which the Fund will invest will be available via the
quote and trade services of their respective primary exchanges as well as in accordance
with the Unlisted Trading Privileges and the CTA plans as applicable Quotation and
last sale information for US exchange-traded options will be available via the Options
Price Reporting Authority Intraday executable price quotations on Floating Rate Debt
Instruments and other assets not traded on an exchange will be available from major
broker-dealer firms or market data vendors as well as from automated quotation systems
published or other public sources or online information services Additionally the Trade
Reporting and Compliance Engine (ldquoTRACErdquo) of the Financial Industry Regulatory
Authority (ldquoFINRArdquo) will be a source of price information for corporate bonds
privately-issued securities mortgage-backed securities and asset-backed securities to the
extent transactions in such securities are reported to TRACE37 For exchange-traded
assets intraday pricing information will be available directly from the applicable listing
exchange
Broker-dealers that are FINRA member firms have an obligation to report transactions in specified debt securities to TRACE to the extent required under applicable FINRA rules Generally such debt securities will have at issuance a maturity that exceeds one calendar year
37
SR-NASDAQ-2015-011 Amendment No 2 Page 22 of 64
Additional information regarding the Fund and the Shares including investment
strategies risks creation and redemption procedures fees Fund holdings disclosure
policies distributions and taxes will be included in the Registration Statement
Initial and Continued Listing
The Shares will be subject to Rule 5735 which sets forth the initial and continued
listing criteria applicable to Managed Fund Shares The Exchange represents that for
initial andor continued listing the Fund must be in compliance with Rule 10A-338 under
the Act A minimum of 100000 Shares will be outstanding at the commencement of
trading on the Exchange The Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the NAV and the
Disclosed Portfolio will be made available to all market participants at the same time
Trading Halts
With respect to trading halts the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading in the Shares of the Fund Nasdaq will
halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12) Trading may be
halted because of market conditions or for reasons that in the view of the Exchange
make trading in the Shares inadvisable These may include (1) the extent to which
trading is not occurring in the securities andor the other assets constituting the Disclosed
Portfolio of the Fund or (2) whether other unusual conditions or circumstances
detrimental to the maintenance of a fair and orderly market are present Trading in the
See 17 CFR 24010A-3 38
SR-NASDAQ-2015-011 Amendment No 2 Page 23 of 64
Shares also will be subject to Rule 5735(d)(2)(D) which sets forth circumstances under
which Shares of the Fund may be halted
Trading Rules
Nasdaq deems the Shares to be equity securities thus rendering trading in the
Shares subject to Nasdaqrsquos existing rules governing the trading of equity securities
Nasdaq will allow trading in the Shares from 400 am until 800 pm Eastern Time
The Exchange has appropriate rules to facilitate transactions in the Shares during all
trading sessions As provided in Nasdaq Rule 5735(b)(3) the minimum price variation
for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $001
Surveillance
The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws39 The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities laws
The surveillances referred to above generally focus on detecting securities trading
outside their normal patterns which could be indicative of manipulative or other violative
activity When such situations are detected surveillance analysis follows and
investigations are opened where appropriate to review the behavior of all relevant
parties for all relevant trading violations
FINRA surveils trading on the Exchange pursuant to a regulatory services agreement The Exchange is responsible for FINRArsquos performance under this regulatory services agreement
39
SR-NASDAQ-2015-011 Amendment No 2 Page 24 of 64
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 25 of 64
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
b Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
SR-NASDAQ-2015-011 Amendment No 2 Page 26 of 64
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
SR-NASDAQ-2015-011 Amendment No 2 Page 27 of 64
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
SR-NASDAQ-2015-011 Amendment No 2 Page 28 of 64
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
SR-NASDAQ-2015-011 Amendment No 2 Page 29 of 64
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
SR-NASDAQ-2015-011 Amendment No 2 Page 30 of 64
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
SR-NASDAQ-2015-011 Amendment No 2 Page 31 of 64
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
4 Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
5 Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received from Members Participants or Others
Written comments were neither solicited nor received
6 Extension of Time Period for Commission Action
The Exchange does not consent at this time to an extension of any time period for
Commission action
7 Basis for Summary Effectiveness Pursuant to Section 19(b)(3) or for Accelerated Effectiveness Pursuant to Section 19(b)(2)
Not applicable
8 Proposed Rule Change Based on Rules of Another Self-Regulatory Organization or of the Commission
Not applicable
9 Security-Based Swap Submissions Filed Pursuant to Section 3C of the Act
Not applicable
SR-NASDAQ-2015-011 Amendment No 2 Page 32 of 64
10 Advance Notices Filed Pursuant to Section 806(e) of the Payment Clearing and Settlement Supervision Act
Not applicable
11 Exhibits
1 Completed notice of proposed rule change for publication in the Federal
Register
SR-NASDAQ-2015-011 Amendment No 2 Page 33 of 64
EXHIBIT 1
SECURITIES AND EXCHANGE COMMISSION (Release No 34shy File No SR-NASDAQ-2015-011)
April __ 2015
Self-Regulatory Organizations The NASDAQ Stock Market LLC Notice of Filing of Proposed Rule Change Relating to the Listing and Trading of the Shares of the First Trust Strategic Floating Rate ETF of First Trust Exchange-Traded Fund IV
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (ldquoActrdquo)1 and
Rule 19b-4 thereunder2 notice is hereby given that on February 12 2015 The NASDAQ
Stock Market LLC (ldquoNasdaqrdquo or the ldquoExchangerdquo) filed with the Securities and Exchange
Commission (ldquoCommissionrdquo) the proposed rule change as described in in Items I II and
III below which Items have been prepared by Nasdaq On April 6 2015 Nasdaq filed
Amendment No 1 which replaced the text of the original filing in its entirety On April
15 2015 Nasdaq filed Amendment No 2 which replaced the text of the original filing in
its entirety The Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons
I Self-Regulatory Organizationrsquos Statement of the Terms of Substance of the Proposed Rule Change
Nasdaq proposes to list and trade the shares of the First Trust Strategic Floating
Rate ETF (the ldquoFundrdquo) of the First Trust Strategic Floating Rate ETF (the ldquoFundrdquo) of
First Trust Exchange-Traded Fund IV (the ldquoTrustrdquo) under Nasdaq Rule 5735 (ldquoManaged
1 15 USC 78s(b)(1)
2 17 CFR 24019b-4
SR-NASDAQ-2015-011 Amendment No 2 Page 34 of 64
Fund Sharesrdquo)3 The shares of the Fund are collectively referred to herein as the
ldquoSharesrdquo
The text of the proposed rule change is available at
httpnasdaqcchwallstreetcom at Nasdaqrsquos principal office and at the Commissionrsquos
Public Reference Room
II Self-Regulatory Organizationrsquos Statement of the Purpose of and Statutory Basis for the Proposed Rule Change
In its filing with the Commission Nasdaq included statements concerning the
purpose of and basis for the proposed rule change The text of these statements may be
examined at the places specified in Item IV below Nasdaq has prepared summaries set
forth in Sections A B and C below of the most significant aspects of such statements
A Self-Regulatory Organizationrsquos Statement of the Purpose of and Statutory Basis for the Proposed Rule Change
1 Purpose
The Exchange proposes to list and trade the Shares of the Fund under Nasdaq
Rule 5735 which governs the listing and trading of Managed Fund Shares4 on the
3 The Commission approved Nasdaq Rule 5735 in Securities Exchange Act Release No 57962 (June 13 2008) 73 FR 35175 (June 20 2008) (SR-NASDAQ-2008shy039) There are already multiple actively-managed funds listed on the Exchange see eg Securities Exchange Act Release Nos 69464 (April 26 2013) 78 FR 25774 (May 2 2013) (SR-NASDAQ-2013-036) (order approving listing and trading of First Trust Senior Loan Fund) 68972 (February 22 2013) 78 FR 13721 (February 28 2013) (SR-NASDAQ-2012-147) (order approving listing and trading of First Trust High Yield LongShort ETF) 66489 (February 29 2012) 77 FR 13379 (March 6 2012) (SR-NASDAQ-2012-004) (order approving listing and trading of WisdomTree Emerging Markets Corporate Bond Fund) The Exchange believes the proposed rule change raises no significant issues not previously addressed in those prior Commission orders
4 A Managed Fund Share is a security that represents an interest in an investment company registered under the Investment Company Act of 1940 (15 USC 80ashy
SR-NASDAQ-2015-011 Amendment No 2 Page 35 of 64
Exchange The Fund will be an actively-managed exchange-traded fund (ldquoETFrdquo) The
Shares will be offered by the Trust which was established as a Massachusetts business
trust on September 15 20105 The Trust is registered with the Commission as an
investment company and has filed a registration statement on Form N-1A (ldquoRegistration
Statementrdquo) with the Commission6 The Fund will be a series of the Trust The Fund
intends to qualify each year as a regulated investment company (ldquoRICrdquo) under
Subchapter M of the Internal Revenue Code of 1986 as amended
First Trust Advisors LP will be the investment adviser (ldquoAdviserrdquo) to the Fund
First Trust Portfolios LP (the ldquoDistributorrdquo) will be the principal underwriter and
distributor of the Fundrsquos Shares The Bank of New York Mellon Corporation (ldquoBNYrdquo)
will act as the administrator accounting agent custodian and transfer agent to the Fund
1) (the ldquo1940 Actrdquo) organized as an open-end investment company or similar entity that invests in a portfolio of securities selected by its investment adviser consistent with its investment objectives and policies In contrast an open-end investment company that issues Index Fund Shares listed and traded on the Exchange under Nasdaq Rule 5705 seeks to provide investment results that correspond generally to the price and yield performance of a specific foreign or domestic stock index fixed income securities index or combination thereof
5 The Commission has issued an order upon which the Trust may rely granting certain exemptive relief under the 1940 Act See Investment Company Act Release No 30029 (April 10 2012) (File No 812-13795) (the ldquoExemptive Reliefrdquo) In addition the Commission has issued no-action relief upon which the Trust may rely pertaining to the Fundrsquos ability to invest in derivatives notwithstanding certain representations in the application for the Exemptive Relief See Commission No-Action Letter (December 6 2012)
6 See Post-Effective Amendment No 104 to Registration Statement on Form N-1A for the Trust dated January 29 2015 (File Nos 333-174332 and 811-22559) The descriptions of the Fund and the Shares contained herein are based in part on information in the Registration Statement
7
SR-NASDAQ-2015-011 Amendment No 2 Page 36 of 64
Paragraph (g) of Rule 5735 provides that if the investment adviser to the
investment company issuing Managed Fund Shares is affiliated with a broker-dealer
such investment adviser shall erect a ldquofire wallrdquo between the investment adviser and the
broker-dealer with respect to access to information concerning the composition andor
changes to such investment company portfolio7 In addition paragraph (g) further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio Rule 5735(g) is similar
to Nasdaq Rule 5705(b)(5)(A)(i) however paragraph (g) in connection with the
establishment of a ldquofire wallrdquo between the investment adviser and the broker-dealer
reflects the applicable open-end fundrsquos portfolio not an underlying benchmark index as
is the case with index-based funds The Adviser is not a broker-dealer although it is
affiliated with the Distributor a broker-dealer The Adviser has implemented a fire wall
An investment adviser to an open-end fund is required to be registered under the Investment Advisers Act of 1940 (the ldquoAdvisers Actrdquo) As a result the Adviser and its related personnel are subject to the provisions of Rule 204A-1 under the Advisers Act relating to codes of ethics This Rule requires investment advisers to adopt a code of ethics that reflects the fiduciary nature of the relationship to clients as well as compliance with other applicable securities laws Accordingly procedures designed to prevent the communication and misuse of non-public information by an investment adviser must be consistent with Rule 204A-1 under the Advisers Act In addition Rule 206(4)-7 under the Advisers Act makes it unlawful for an investment adviser to provide investment advice to clients unless such investment adviser has (i) adopted and implemented written policies and procedures reasonably designed to prevent violation by the investment adviser and its supervised persons of the Advisers Act and the Commission rules adopted thereunder (ii) implemented at a minimum an annual review regarding the adequacy of the policies and procedures established pursuant to subparagraph (i) above and the effectiveness of their implementation and (iii) designated an individual (who is a supervised person) responsible for administering the policies and procedures adopted under subparagraph (i) above
8
SR-NASDAQ-2015-011 Amendment No 2 Page 37 of 64
with respect to its broker-dealer affiliate regarding access to information concerning the
composition andor changes to the portfolio In addition personnel who make decisions
on the Fundrsquos portfolio composition will be subject to procedures designed to prevent the
use and dissemination of material non-public information regarding the Fundrsquos portfolio
In the event (a) the Adviser becomes or becomes newly affiliated with a broker-dealer
or (b) any new adviser or sub-adviser is a registered broker-dealer or becomes affiliated
with another broker-dealer it will implement a fire wall with respect to its relevant
personnel andor such broker-dealer affiliate as applicable regarding access to
information concerning the composition andor changes to the portfolio and will be
subject to procedures designed to prevent the use and dissemination of material
non-public information regarding such portfolio The Fund does not currently intend to
use a sub-adviser
First Trust Strategic Floating Rate ETF
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions8 at least 80 of its
The term ldquounder normal market conditionsrdquo as used herein includes but is not limited to the absence of adverse market economic political or other conditions including extreme volatility or trading halts in the fixed income markets or the financial markets generally operational issues causing dissemination of inaccurate market information or force majeure type events such as systems failure natural or man-made disaster act of God armed conflict act of terrorism riot or labor disruption or any similar intervening circumstance For temporary defensive purposes during the initial invest-up period and during periods of high cash inflows or outflows the Fund may depart from its principal investment strategies for example it may hold a higher than normal proportion of its assets in cash During such periods the Fund may not be able to achieve its investment objective The Fund may adopt a defensive strategy when the Adviser believes securities in which the Fund normally invests have elevated risks due to political or economic factors and in other extraordinary circumstances
SR-NASDAQ-2015-011 Amendment No 2 Page 38 of 64
net assets in a portfolio of the following types of floating-rate9 debt instruments issued by
US and non-US public- and private-sector entities floating-rate corporate10 and
government bonds and notes floating-rate agency securities 11 floating-rate instruments
of non-US issuers floating-rate privately-issued securities 12 floating-rate asset-backed
securities 13 floating-rate mortgage-backed securities14 floating-rate loans 15 and
9 For the avoidance of doubt the term ldquofloating-raterdquo shall also include similar terms such as ldquovariable-raterdquo and ldquoadjustable-raterdquo
10 The Adviser expects that under normal market conditions generally for a corporate bond to be considered as an eligible investment after taking into account such an investment at least 75 of the Fundrsquos net assets that are invested in floating-rate corporate bonds and as described below fixed-rate corporate bonds (in the aggregate) will be comprised of corporate bonds that have at the time of original issuance $100 million or more par amount outstanding
11 ldquoAgency securitiesrdquo for these purposes generally includes securities issued by the following entities Government National Mortgage Association (Ginnie Mae) Federal National Mortgage Association (Fannie Mae) Federal Home Loan Banks (FHLBanks) Federal Home Loan Mortgage Corporation (Freddie Mac) Farm Credit System (FCS) Farm Credit Banks (FCBanks) Student Loan Marketing Association (Sallie Mae) Resolution Funding Corporation (REFCORP) Financing Corporation (FICO) and the Farm Credit System (FCS) Financial Assistance Corporation (FAC) Agency securities can include but are not limited to mortgage-backed securities
12 ldquoPrivately-issued securitiesrdquo for these purposes generally includes Rule 144A securities other than mortgage-backed Rule 144A securities Under normal market conditions privately-issued securities will have at the time of original issuance $100 million or more principal amount outstanding to be considered eligible investments
13 Asset-backed securities are securities that are backed by a pool of assets The Fund currently intends to invest in asset-backed securities that are consumer asset-backed securities
14 Mortgage-backed securities which are securities that directly or indirectly represent a participation in or are secured by and payable from mortgage loans on real property will consist of (1) residential mortgage-backed securities (ldquoRMBSrdquo) (2) commercial mortgage-backed securities (ldquoCMBSrdquo) (3) stripped mortgage-backed securities (ldquoSMBSrdquo) which are mortgage-backed securities
SR-NASDAQ-2015-011 Amendment No 2 Page 39 of 64
investment companies16 (including investment companies advised by the Adviser) that
invest primarily in the foregoing types of debt instruments17 (collectively ldquoFloating Rate
Debt Instrumentsrdquo)
where mortgage payments are divided between paying the loanrsquos principal and paying the loanrsquos interest (4) collateralized mortgage obligations (ldquoCMOsrdquo) and real estate mortgage investment conduits (ldquoREMICsrdquo) which are mortgage-backed securities that are divided into multiple classes with each class being entitled to a different share of the principal and interest payments received from the pool of underlying assets
15 The floating-rate loans in which the Fund will invest will represent amounts borrowed by companies or other entities from banks and other lenders and a significant portion of such floating-rate loans may be rated below investment grade or unrated Floating-rate loans held by the Fund may be senior or subordinate obligations of the borrower and may or may not be secured by collateral First lien senior secured floating-rate loans are referred to herein as ldquosenior loansrdquo Floating-rate loans that are not senior loans (ie unsecured floating-rate loans and secured floating-rate loans that are not first lien floating-rate loans) are referred to herein as ldquojunior loansrdquo The Fund will generally invest in floating-rate loans that the Adviser deems to be liquid with readily available prices notwithstanding the foregoing the Fund may invest in floating-rate loans that are deemed illiquid so long as the Fund complies with the 15 limitation on investments of its net assets in illiquid assets described below under ldquoInvestment Restrictionsrdquo
16 The Fund currently anticipates investing only in registered open-end investment companies that are listed and traded in the US on registered exchanges (ie other ETFs) An ETF is an investment company registered under the 1940 Act that holds a portfolio of securities Many ETFs are designed to track the performance of a securities index including industry sector country and region indexes The Fund may invest in the securities of ETFs in excess of the limits imposed under the 1940 Act pursuant to exemptive orders obtained by other ETFs and their sponsors from the Commission In addition the Fund may invest in the securities of certain investment companies in excess of the limits imposed under the 1940 Act pursuant to an exemptive order obtained by the Trust and the Adviser from the Commission See Investment Company Act Release No 30377 (February 5 2013) (File No 812-13895) The ETFs in which the Fund may invest include Index Fund Shares (as described in Nasdaq Rule 5705) Portfolio Depository Receipts (as described in Nasdaq Rule 5705) and Managed Fund Shares (as described in Nasdaq Rule 5735) While the Fund may invest in inverse ETFs the Fund will not invest in leveraged or inverse leveraged (eg 2X or -3X) ETFs
SR-NASDAQ-2015-011 Amendment No 2 Page 40 of 64
At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade To be considered
ldquoinvestment graderdquo under normal market conditions rated Floating Rate Debt
Instruments will carry at the time of purchase a rating in the highest four rating
categories of at least one nationally recognized statistical ratings organization
(ldquoNRSROrdquo) (eg BBB- or higher by Standard amp Poorrsquos Ratings Services (ldquoSampPrdquo)
andor Fitch Ratings (ldquoFitchrdquo) or Baa3 or higher by Moodyrsquos Investors Service Inc
(ldquoMoodyrsquosrdquo)18 For unrated securities to be considered ldquoinvestment graderdquo under normal
market conditions such securities will be determined at the time of purchase to be of
comparable quality19 by the Adviser The Fund may invest up to 35 of its net assets in
securities that are at the time of investment rated below investment grade by each
NRSRO rating such securities (or securities that are unrated and determined by the
17 The liquidity of a security especially in the case of asset-backed and mortgage-backed securities will be a substantial factor in the Fundrsquos security selection process Consistent with the discussion below under ldquoInvestment Restrictionsrdquo the Fund will not purchase any Floating Rate Debt Instruments (including asset-backed securities and mortgage-backed securities) that in the Adviserrsquos opinion are illiquid if as a result more than 15 of the value of the Fundrsquos net assets will be invested in illiquid assets
18 For the avoidance of doubt if a security is rated by multiple NRSROs and receives different ratings the Fund will treat the security as being rated in the highest rating category received from an NRSRO
19 Comparable quality of unrated securities will be determined by the Adviser based on fundamental credit analysis of the unrated security and comparable NRSRO-rated securities On a best efforts basis the Adviser will attempt to make a rating determination based on publicly available data In making a ldquocomparable qualityrdquo determination the Adviser may consider for example whether the issuer of the security has issued other rated securities the nature and provisions of the relevant security whether the obligations under the relevant security are guaranteed by another entity and the rating of such guarantor (if any) relevant cash flows macroeconomic analysis andor sector or industry analysis
SR-NASDAQ-2015-011 Amendment No 2 Page 41 of 64
Adviser to be of comparable quality) commonly referred to as ldquohigh yieldrdquo or ldquojunkrdquo
bonds If subsequent to purchase by the Fund a security held by the Fund experiences a
decline in credit quality and falls below investment grade the Fund may continue to hold
the security and it will not cause the Fund to violate the 35 investment limitation
however the security will be taken into account for purposes of determining whether
purchases of additional securities will cause the Fund to violate such limitation
The Fund will limit its investments in asset-backed securities (excluding agency
mortgage-backed securities) and non-agency mortgage-backed securities (in the
aggregate) to 20 of its net assets20 In addition the Fund will limit its investments in
junior loans to 20 of its net assets
The Fund will hold debt securities (including in the aggregate Floating Rate
Debt Instruments and the fixed-rate debt securities described below) of at least 13
non-affiliated issuers
Other Investments
Under normal market conditions the Fund will invest primarily in the Floating
Rate Debt Instruments described above to meet its investment objective In addition the
Fund may invest up to 20 of its net assets in the following types of fixed-rate debt
securities corporate21 and government bonds and notes agency securities22 instruments
20 For the avoidance of doubt there is no limitation on the Fundrsquos investments in agency mortgage-backed securities
21 See footnote 10 above
22 See footnote 11 above
SR-NASDAQ-2015-011 Amendment No 2 Page 42 of 64
of non-US issuers in developed markets privately-issued securities 23 asset-backed
securities 24 mortgage-backed securities 25 municipal bonds money market securities26
and investment companies27 (including investment companies advised by the Adviser)
that invest primarily in the foregoing types of debt securities
Further to pursue its investment objective the Fund may invest up to 20 of the
value of its net assets in exchange-listed options on US Treasury futures contracts and
exchange-listed US Treasury futures contracts28 The use of these derivative
transactions may allow the Fund to obtain net long or short exposures to selected interest
rates These derivatives may also be used to hedge risks including interest rate risks and
credit risks associated with the Fundrsquos portfolio investments The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
23 See footnote 12 above
24 See footnote 13 above
25 See footnote 14 above
26 ldquoMoney market securitiesrdquo for these purposes generally includes short-term high-quality obligations issued or guaranteed by the US Treasury or the agencies or instrumentalities of the US government short-term high-quality securities issued or guaranteed by non-US governments agencies and instrumentalities repurchase agreements commercial paper (both asset-backed and non-assetshybacked) and deposits and other obligations of US and non-US banks and financial institutions
27 See footnote 16 above
28 At least 90 of the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be invested in instruments that trade in markets that are members of the Intermarket Surveillance Group (ldquoISGrdquo) (see footnote 40 below) or are parties to a comprehensive surveillance sharing agreement with the Exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 43 of 64
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index
Investment Restrictions
The Fund will not invest 25 or more of the value of its total assets in securities
of issuers in any one industry This restriction does not apply to (a) obligations issued or
guaranteed by the US government its agencies or instrumentalities or (b) securities of
other investment companies29
The Fund may hold up to an aggregate amount of 15 of its net assets in illiquid
assets (calculated at the time of investment) including Rule 144A securities deemed
illiquid by the Adviser30 The Fund will monitor its portfolio liquidity on an ongoing
basis to determine whether in light of current circumstances an adequate level of
liquidity is being maintained and will consider taking appropriate steps in order to
maintain adequate liquidity if through a change in values net assets or other
circumstances more than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid
assets include securities subject to contractual or other restrictions on resale and other
29 See Form N-1A Item 9 The Commission has taken the position that a fund is concentrated if it invests more than 25 of the value of its total assets in any one industry See eg Investment Company Act Release No 9011 (October 30 1975) 40 FR 54241 (November 21 1975)
30 In reaching liquidity decisions the Adviser may consider the following factors the frequency of trades and quotes for the security the number of dealers wishing to purchase or sell the security and the number of other potential purchasers dealer undertakings to make a market in the security and the nature of the security and the nature of the marketplace in which it trades (eg the time needed to dispose of the security the method of soliciting offers and the mechanics of transfer)
SR-NASDAQ-2015-011 Amendment No 2 Page 44 of 64
instruments that lack readily available markets as determined in accordance with
Commission staff guidance31
The Fund will not invest in non-US equity securities
Creation and Redemption of Shares
The Fund will issue and redeem Shares on a continuous basis at net asset value
(ldquoNAVrdquo)32 only in large blocks of Shares (ldquoCreation Unitsrdquo) in transactions with
authorized participants generally including broker-dealers and large institutional
investors (ldquoAuthorized Participantsrdquo) Creation Units generally will consist of 50000
Shares although this may change from time to time Creation Units however are not
expected to consist of less than 50000 Shares As described in the Registration
Statement and consistent with the Exemptive Relief the Fund will issue and redeem
Creation Units in exchange for an in-kind portfolio of instruments andor cash in lieu of
31 The Commission has stated that long-standing Commission guidelines have required open-end funds to hold no more than 15 of their net assets in illiquid securities and other illiquid assets See Investment Company Act Release No 28193 (March 11 2008) 73 FR 14618 (March 18 2008) footnote 34 See also Investment Company Act Release No 5847 (October 21 1969) 35 FR 19989 (December 31 1970) (Statement Regarding ldquoRestricted Securitiesrdquo) Investment Company Act Release No 18612 (March 12 1992) 57 FR 9828 (March 20 1992) (Revisions of Guidelines to Form N-1A) A fundrsquos portfolio security is illiquid if it cannot be disposed of in the ordinary course of business within seven days at approximately the value ascribed to it by the fund See Investment Company Act Release No 14983 (March 12 1986) 51 FR 9773 (March 21 1986) (adopting amendments to Rule 2a-7 under the 1940 Act) Investment Company Act Release No 17452 (April 23 1990) 55 FR 17933 (April 30 1990) (adopting Rule 144A under the Securities Act of 1933)
32 The NAV of the Fundrsquos Shares generally will be calculated once daily Monday through Friday as of the close of regular trading on the New York Stock Exchange generally 400 pm Eastern Time (the ldquoNAV Calculation Timerdquo) NAV per Share will be calculated by dividing the Fundrsquos net assets by the number of Fund Shares outstanding For more information regarding the valuation of Fund investments in calculating the Fundrsquos NAV see the Registration Statement
SR-NASDAQ-2015-011 Amendment No 2 Page 45 of 64
such instruments (the ldquoCreation Basketrdquo) In addition if there is a difference between the
NAV attributable to a Creation Unit and the market value of the Creation Basket
exchanged for the Creation Unit the party conveying instruments with the lower value
will pay to the other an amount in cash equal to the difference (referred to as the ldquoCash
Componentrdquo)
Creations and redemptions must be made by or through an Authorized Participant
that has executed an agreement that has been agreed to by the Distributor and BNY with
respect to creations and redemptions of Creation Units All standard orders to create
Creation Units must be received by the transfer agent no later than the closing time of the
regular trading session on the New York Stock Exchange (ordinarily 400 pm Eastern
Time) (the ldquoClosing Timerdquo) in each case on the date such order is placed in order for the
creation of Creation Units to be effected based on the NAV of Shares as next determined
on such date after receipt of the order in proper form Shares may be redeemed only in
Creation Units at their NAV next determined after receipt not later than the Closing Time
of a redemption request in proper form by the Fund through the transfer agent and only
on a business day
The Fundrsquos custodian through the National Securities Clearing Corporation will
make available on each business day prior to the opening of business of the Exchange
the list of the names and quantities of the instruments comprising the Creation Basket as
well as the estimated Cash Component (if any) for that day The published Creation
Basket will apply until a new Creation Basket is announced on the following business
day prior to commencement of trading in the Shares
SR-NASDAQ-2015-011 Amendment No 2 Page 46 of 64
Net Asset Value
The Fundrsquos NAV will be determined as of the close of trading (normally
400 pm Eastern Time) on each day the New York Stock Exchange is open for
business NAV will be calculated for the Fund by taking the market price of the Fundrsquos
total assets including interest or dividends accrued but not yet collected less all
liabilities and dividing such amount by the total number of Shares outstanding The
result rounded to the nearest cent will be the NAV per Share All valuations will be
subject to review by the Board of Trustees of the Trust (ldquoTrust Boardrdquo) or its delegate
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with valuation procedures (which may be revised from time to time) adopted by the Trust
Board (the ldquoValuation Proceduresrdquo) and in accordance with the 1940 Act A market
valuation generally means a valuation (i) obtained from an exchange an independent
pricing service (ldquoPricing Servicerdquo) or a major market maker (or dealer) or (ii) based on a
price quotation or other equivalent indication of value supplied by an exchange a Pricing
Service or a major market maker (or dealer) The information summarized below is
based on the Valuation Procedures as currently in effect however as noted above the
Valuation Procedures are amended from time to time and therefore such information is
subject to change
Certain securities including Floating Rate Debt Instruments in which the Fund
may invest will not be listed on any securities exchange or board of trade Such
securities will typically be bought and sold by institutional investors in individually
negotiated private transactions that function in many respects like an over-the-counter
SR-NASDAQ-2015-011 Amendment No 2 Page 47 of 64
secondary market although typically no formal market makers will exist Certain
securities particularly debt securities will have few or no trades or trade infrequently
and information regarding a specific security may not be widely available or may be
incomplete Accordingly determinations of the fair value of debt securities may be
based on infrequent and dated information Because there is less reliable objective data
available elements of judgment may play a greater role in valuation of debt securities
than for other types of securities Typically Floating Rate Debt Instruments and other
debt securities in which the Fund may invest (other than those described below) will be
valued using information provided by a Pricing Service Debt securities having a
remaining maturity of 60 days or less when purchased will be valued at cost adjusted for
amortization of premiums and accretion of discounts provided the Adviserrsquos pricing
committee (the ldquoPricing Committeerdquo) has determined that the use of amortized cost is an
appropriate reflection of fair value given market and issuer-specific conditions existing at
the time of the determination Overnight repurchase agreements will be valued at cost
and term repurchase agreements (ie those whose maturity exceeds seven days) will be
valued at the average of the bid quotations obtained daily from at least two recognized
dealers
Asset-backed and mortgage-backed securities will generally be valued by using a
Pricing Service If a Pricing Service does not cover a particular asset-backed or
mortgage-backed security or discontinues covering a particular asset-backed or
mortgage-backed security the security will be priced using broker quotes generally
provided by brokers that make or participate in markets in the security To derive values
Pricing Services and broker-dealers may use matrix pricing and valuation models as well
SR-NASDAQ-2015-011 Amendment No 2 Page 48 of 64
as recent market transactions for the same or similar assets As it deems appropriate the
Pricing Committee may determine that a Pricing Service price does not represent an
accurate value of an asset-backed or mortgage-backed security based on broker quotes it
receives a recent trade in the security by the Fund information from a portfolio manager
or other market information In the event that the Pricing Committee determines that the
Pricing Service price is unreliable or inaccurate based on such other information broker
quotes may be used Additionally if the Pricing Committee determines that the price of
an asset-backed or mortgage-backed security obtained from a Pricing Service and
available broker quotes is unreliable or inaccurate due to market conditions or other
reasons or if a Pricing Service price or broker quote is unavailable the security will be
valued using fair value pricing as described below
Equity securities listed on any exchange other than the Exchange will be valued at
the last sale price on the exchange on which they are principally traded on the business
day as of which such value is being determined Equity securities listed on the Exchange
will be valued at the official closing price on the business day as of which such value is
being determined If there has been no sale on such day or no official closing price in
the case of securities traded on the Exchange the securities will be valued using fair
value pricing as described below Equity securities traded on more than one securities
exchange will be valued at the last sale price or official closing price as applicable on
the business day as of which such value is being determined at the close of the exchange
representing the principal market for such securities
Exchange-traded options and futures contracts will be valued at the closing price
in the market where such contracts are principally traded
SR-NASDAQ-2015-011 Amendment No 2 Page 49 of 64
Certain securities including Floating Rate Debt Instruments in which the Fund
will invest will not be able to be priced by pre-established pricing methods Such
securities may be valued by the Trust Board or its delegate at fair value The use of fair
value pricing by the Fund will be governed by the Valuation Procedures and conducted in
accordance with the provisions of the 1940 Act Valuing the Fundrsquos securities using fair
value pricing will result in using prices for those securities that may differ from current
market valuations or official closing prices on the applicable exchange
Availability of Information
The Fundrsquos website (wwwftportfolioscom) which will be publicly available
prior to the public offering of Shares will include a form of the prospectus for the Fund
that may be downloaded The website will include the Sharesrsquo ticker CUSIP and
exchange information along with additional quantitative information updated on a daily
basis including for the Fund (1) daily trading volume the prior business dayrsquos reported
NAV and closing price mid-point of the bidask spread at the time of calculation of such
NAV (the ldquoBidAsk Pricerdquo)33 and a calculation of the premium and discount of the
BidAsk Price against the NAV and (2) data in chart format displaying the frequency
distribution of discounts and premiums of the daily BidAsk Price against the NAV
within appropriate ranges for each of the four previous calendar quarters On each
business day before commencement of trading in Shares in the Regular Market Session34
33 The BidAsk Price of the Fund will be determined using the mid-point of the highest bid and the lowest offer on the Exchange as of the time of calculation of the Fundrsquos NAV The records relating to BidAsk Prices will be retained by the Fund and its service providers
34 See Nasdaq Rule 4120(b)(4) (describing the three trading sessions on the Exchange (1) Pre-Market Session from 4 am to 930 am Eastern Time (2)
SR-NASDAQ-2015-011 Amendment No 2 Page 50 of 64
on the Exchange the Fund will disclose on its website the identities and quantities of the
portfolio of securities and other assets (the ldquoDisclosed Portfoliordquo as defined in Nasdaq
Rule 5735(c)(2)) held by the Fund that will form the basis for the Fundrsquos calculation of
NAV at the end of the business day 35 The Fundrsquos disclosure of derivative positions in
the Disclosed Portfolio will include information that market participants can use to value
these positions intraday On a daily basis the Fund will disclose on the Fundrsquos website
the following information regarding each portfolio holding as applicable to the type of
holding ticker symbol CUSIP number or other identifier if any a description of the
holding (including the type of holding) the identity of the security or other asset or
instrument underlying the holding if any for options the option strike price quantity
held (as measured by for example par value notional value or number of shares
contracts or units) maturity date if any coupon rate if any effective date if any market
value of the holding and percentage weighting of the holding in the Fundrsquos portfolio
The website information will be publicly available at no charge
In addition for the Fund an estimated value defined in Rule 5735(c)(3) as the
ldquoIntraday Indicative Valuerdquo that reflects an estimated intraday value of the Fundrsquos
Disclosed Portfolio will be disseminated Moreover the Intraday Indicative Value
Regular Market Session from 930 am to 4 pm or 415 pm Eastern Time and (3) Post-Market Session from 4 pm or 415 pm to 8 pm Eastern Time)
Under accounting procedures to be followed by the Fund trades made on the prior business day (ldquoTrdquo) will be booked and reflected in NAV on the current business day (ldquoT+1rdquo) Accordingly the Fund will be able to disclose at the beginning of the business day the portfolio that will form the basis for the NAV calculation at the end of the business day
35
SR-NASDAQ-2015-011 Amendment No 2 Page 51 of 64
available on the NASDAQ OMX Information LLC proprietary index data service36 will
be based upon the current value for the components of the Disclosed Portfolio and will be
updated and widely disseminated by one or more major market data vendors and broadly
displayed at least every 15 seconds during the Regular Market Session The Intraday
Indicative Value will be based on quotes and closing prices from the securitiesrsquo local
market and may not reflect events that occur subsequent to the local marketrsquos close
Premiums and discounts between the Intraday Indicative Value and the market price may
occur This should not be viewed as a ldquoreal timerdquo update of the NAV per Share of the
Fund which is calculated only once a day
The dissemination of the Intraday Indicative Value together with the Disclosed
Portfolio will allow investors to determine the value of the underlying portfolio of the
Fund on a daily basis and will provide a close estimate of that value throughout the
trading day
Investors will also be able to obtain the Fundrsquos Statement of Additional
Information (ldquoSAIrdquo) the Fundrsquos annual and semi-annual reports (together ldquoShareholder
Reportsrdquo) and its Form N-CSR and Form N-SAR filed twice a year The Fundrsquos SAI
and Shareholder Reports will be available free upon request from the Fund and those
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or
downloaded from the Commissionrsquos website at wwwsecgov Information regarding
Currently the NASDAQ OMX Global Index Data Service (ldquoGIDSrdquo) is the NASDAQ OMX global index data feed service offering real-time updates daily summary messages and access to widely followed indexes and Intraday Indicative Values for ETFs GIDS provides investment professionals with the daily information needed to track or trade NASDAQ OMX indexes listed ETFs or third-party partner indexes and ETFs
36
SR-NASDAQ-2015-011 Amendment No 2 Page 52 of 64
market price and trading volume of the Shares will be continually available on a real-time
basis throughout the day on brokersrsquo computer screens and other electronic services
Information regarding the previous dayrsquos closing price and trading volume information
for the Shares will be published daily in the financial section of newspapers Quotation
and last sale information for the Shares will be available via Nasdaq proprietary quote
and trade services as well as in accordance with the Unlisted Trading Privileges and the
Consolidated Tape Association (ldquoCTArdquo) plans for the Shares Quotation and last sale
information for the other ETFs in which the Fund will invest will be available via the
quote and trade services of their respective primary exchanges as well as in accordance
with the Unlisted Trading Privileges and the CTA plans as applicable Quotation and
last sale information for US exchange-traded options will be available via the Options
Price Reporting Authority Intraday executable price quotations on Floating Rate Debt
Instruments and other assets not traded on an exchange will be available from major
broker-dealer firms or market data vendors as well as from automated quotation systems
published or other public sources or online information services Additionally the Trade
Reporting and Compliance Engine (ldquoTRACErdquo) of the Financial Industry Regulatory
Authority (ldquoFINRArdquo) will be a source of price information for corporate bonds
privately-issued securities mortgage-backed securities and asset-backed securities to the
extent transactions in such securities are reported to TRACE37 For exchange-traded
Broker-dealers that are FINRA member firms have an obligation to report transactions in specified debt securities to TRACE to the extent required under applicable FINRA rules Generally such debt securities will have at issuance a maturity that exceeds one calendar year
37
SR-NASDAQ-2015-011 Amendment No 2 Page 53 of 64
assets intraday pricing information will be available directly from the applicable listing
exchange
Additional information regarding the Fund and the Shares including investment
strategies risks creation and redemption procedures fees Fund holdings disclosure
policies distributions and taxes will be included in the Registration Statement
Initial and Continued Listing
The Shares will be subject to Rule 5735 which sets forth the initial and continued
listing criteria applicable to Managed Fund Shares The Exchange represents that for
initial andor continued listing the Fund must be in compliance with Rule 10A-338 under
the Act A minimum of 100000 Shares will be outstanding at the commencement of
trading on the Exchange The Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the NAV and the
Disclosed Portfolio will be made available to all market participants at the same time
Trading Halts
With respect to trading halts the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading in the Shares of the Fund Nasdaq will
halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12) Trading may be
halted because of market conditions or for reasons that in the view of the Exchange
make trading in the Shares inadvisable These may include (1) the extent to which
trading is not occurring in the securities andor the other assets constituting the Disclosed
Portfolio of the Fund or (2) whether other unusual conditions or circumstances
See 17 CFR 24010A-3 38
SR-NASDAQ-2015-011 Amendment No 2 Page 54 of 64
detrimental to the maintenance of a fair and orderly market are present Trading in the
Shares also will be subject to Rule 5735(d)(2)(D) which sets forth circumstances under
which Shares of the Fund may be halted
Trading Rules
Nasdaq deems the Shares to be equity securities thus rendering trading in the
Shares subject to Nasdaqrsquos existing rules governing the trading of equity securities
Nasdaq will allow trading in the Shares from 400 am until 800 pm Eastern Time
The Exchange has appropriate rules to facilitate transactions in the Shares during all
trading sessions As provided in Nasdaq Rule 5735(b)(3) the minimum price variation
for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $001
Surveillance
The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws39 The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities laws
The surveillances referred to above generally focus on detecting securities trading
outside their normal patterns which could be indicative of manipulative or other violative
activity When such situations are detected surveillance analysis follows and
FINRA surveils trading on the Exchange pursuant to a regulatory services agreement The Exchange is responsible for FINRArsquos performance under this regulatory services agreement
39
SR-NASDAQ-2015-011 Amendment No 2 Page 55 of 64
investigations are opened where appropriate to review the behavior of all relevant
parties for all relevant trading violations
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 56 of 64
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
SR-NASDAQ-2015-011 Amendment No 2 Page 57 of 64
2 Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
SR-NASDAQ-2015-011 Amendment No 2 Page 58 of 64
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
SR-NASDAQ-2015-011 Amendment No 2 Page 59 of 64
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
SR-NASDAQ-2015-011 Amendment No 2 Page 60 of 64
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 61 of 64
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
SR-NASDAQ-2015-011 Amendment No 2 Page 62 of 64
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
B Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
C Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received From Members Participants or Others
Written comments were neither solicited nor received
III Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Within 45 days of the date of publication of this notice in the Federal Register or
within such longer period (i) as the Commission may designate up to 90 days of such date
if it finds such longer period to be appropriate and publishes its reasons for so finding or
(ii) as to which the Exchange consents the Commission shall (a) by order approve or
disapprove such proposed rule change or (b) institute proceedings to determine whether
the proposed rule change should be disapproved
SR-NASDAQ-2015-011 Amendment No 2 Page 63 of 64
IV Solicitation of Comments
Interested persons are invited to submit written data views and arguments
concerning the foregoing including whether the proposed rule change is consistent with
the Act Comments may be submitted by any of the following methods
Electronic comments
bull Use the Commissionrsquos Internet comment form
(httpwwwsecgovrulessroshtml) or
bull Send an e-mail to rule-commentssecgov Please include File Number
SR-NASDAQ-2015-011 on the subject line
Paper comments
bull Send paper comments in triplicate to Brent J Fields Secretary Securities and
Exchange Commission Station Place 100 F Street NE Washington DC
20549-9303
All submissions should refer to File Number SR-NASDAQ-2015-011 This file number
should be included on the subject line if e-mail is used To help the Commission process
and review your comments more efficiently please use only one method The
Commission will post all comments on the Commissionrsquos Internet website
httpwwwsecgovrulessroshtml
Copies of the submission all subsequent amendments all written statements with
respect to the proposed rule change that are filed with the Commission and all written
communications relating to the proposed rule change between the Commission and any
person other than those that may be withheld from the public in accordance with the
provisions of 5 USC 552 will be available for website viewing and printing in the
Commissionrsquos Public Reference Room 100 F Street NE Washington DC 20549 on
SR-NASDAQ-2015-011 Amendment No 2 Page 64 of 64
official business days between the hours of 1000 am and 300 pm Copies of the filing
also will be available for inspection and copying at the principal office of Nasdaq All
comments received will be posted without change the Commission does not edit
personal identifying information from submissions You should submit only information
that you wish to make available publicly
All submissions should refer to File Number SR-NASDAQ-2015-011 and should
be submitted on or before [insert date 21 days from publication in the Federal Register]
For the Commission by the Division of Trading and Markets pursuant to
delegated authority41
Kevin M OrsquoNeill Deputy Secretary
17 CFR 20030-3(a)(12) 41
SR-NASDAQ-2015-011 Amendment No 2 Page 12 of 64
credit risks associated with the Fundrsquos portfolio investments The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index
Investment Restrictions
The Fund will not invest 25 or more of the value of its total assets in securities
of issuers in any one industry This restriction does not apply to (a) obligations issued or
guaranteed by the US government its agencies or instrumentalities or (b) securities of
other investment companies29
The Fund may hold up to an aggregate amount of 15 of its net assets in illiquid
assets (calculated at the time of investment) including Rule 144A securities deemed
illiquid by the Adviser30 The Fund will monitor its portfolio liquidity on an ongoing
basis to determine whether in light of current circumstances an adequate level of
liquidity is being maintained and will consider taking appropriate steps in order to
maintain adequate liquidity if through a change in values net assets or other
circumstances more than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid
assets include securities subject to contractual or other restrictions on resale and other
29 See Form N-1A Item 9 The Commission has taken the position that a fund is concentrated if it invests more than 25 of the value of its total assets in any one industry See eg Investment Company Act Release No 9011 (October 30 1975) 40 FR 54241 (November 21 1975)
30 In reaching liquidity decisions the Adviser may consider the following factors the frequency of trades and quotes for the security the number of dealers wishing to purchase or sell the security and the number of other potential purchasers dealer undertakings to make a market in the security and the nature of the security and the nature of the marketplace in which it trades (eg the time needed to dispose of the security the method of soliciting offers and the mechanics of transfer)
SR-NASDAQ-2015-011 Amendment No 2 Page 13 of 64
instruments that lack readily available markets as determined in accordance with
Commission staff guidance31
The Fund will not invest in non-US equity securities
Creation and Redemption of Shares
The Fund will issue and redeem Shares on a continuous basis at net asset value
(ldquoNAVrdquo)32 only in large blocks of Shares (ldquoCreation Unitsrdquo) in transactions with
authorized participants generally including broker-dealers and large institutional
investors (ldquoAuthorized Participantsrdquo) Creation Units generally will consist of 50000
Shares although this may change from time to time Creation Units however are not
expected to consist of less than 50000 Shares As described in the Registration
Statement and consistent with the Exemptive Relief the Fund will issue and redeem
Creation Units in exchange for an in-kind portfolio of instruments andor cash in lieu of
31 The Commission has stated that long-standing Commission guidelines have required open-end funds to hold no more than 15 of their net assets in illiquid securities and other illiquid assets See Investment Company Act Release No 28193 (March 11 2008) 73 FR 14618 (March 18 2008) footnote 34 See also Investment Company Act Release No 5847 (October 21 1969) 35 FR 19989 (December 31 1970) (Statement Regarding ldquoRestricted Securitiesrdquo) Investment Company Act Release No 18612 (March 12 1992) 57 FR 9828 (March 20 1992) (Revisions of Guidelines to Form N-1A) A fundrsquos portfolio security is illiquid if it cannot be disposed of in the ordinary course of business within seven days at approximately the value ascribed to it by the fund See Investment Company Act Release No 14983 (March 12 1986) 51 FR 9773 (March 21 1986) (adopting amendments to Rule 2a-7 under the 1940 Act) Investment Company Act Release No 17452 (April 23 1990) 55 FR 17933 (April 30 1990) (adopting Rule 144A under the Securities Act of 1933)
32 The NAV of the Fundrsquos Shares generally will be calculated once daily Monday through Friday as of the close of regular trading on the New York Stock Exchange generally 400 pm Eastern Time (the ldquoNAV Calculation Timerdquo) NAV per Share will be calculated by dividing the Fundrsquos net assets by the number of Fund Shares outstanding For more information regarding the valuation of Fund investments in calculating the Fundrsquos NAV see the Registration Statement
SR-NASDAQ-2015-011 Amendment No 2 Page 14 of 64
such instruments (the ldquoCreation Basketrdquo) In addition if there is a difference between the
NAV attributable to a Creation Unit and the market value of the Creation Basket
exchanged for the Creation Unit the party conveying instruments with the lower value
will pay to the other an amount in cash equal to the difference (referred to as the ldquoCash
Componentrdquo)
Creations and redemptions must be made by or through an Authorized Participant
that has executed an agreement that has been agreed to by the Distributor and BNY with
respect to creations and redemptions of Creation Units All standard orders to create
Creation Units must be received by the transfer agent no later than the closing time of the
regular trading session on the New York Stock Exchange (ordinarily 400 pm Eastern
Time) (the ldquoClosing Timerdquo) in each case on the date such order is placed in order for the
creation of Creation Units to be effected based on the NAV of Shares as next determined
on such date after receipt of the order in proper form Shares may be redeemed only in
Creation Units at their NAV next determined after receipt not later than the Closing Time
of a redemption request in proper form by the Fund through the transfer agent and only
on a business day
The Fundrsquos custodian through the National Securities Clearing Corporation will
make available on each business day prior to the opening of business of the Exchange
the list of the names and quantities of the instruments comprising the Creation Basket as
well as the estimated Cash Component (if any) for that day The published Creation
Basket will apply until a new Creation Basket is announced on the following business
day prior to commencement of trading in the Shares
SR-NASDAQ-2015-011 Amendment No 2 Page 15 of 64
Net Asset Value
The Fundrsquos NAV will be determined as of the close of trading (normally
400 pm Eastern Time) on each day the New York Stock Exchange is open for
business NAV will be calculated for the Fund by taking the market price of the Fundrsquos
total assets including interest or dividends accrued but not yet collected less all
liabilities and dividing such amount by the total number of Shares outstanding The
result rounded to the nearest cent will be the NAV per Share All valuations will be
subject to review by the Board of Trustees of the Trust (ldquoTrust Boardrdquo) or its delegate
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with valuation procedures (which may be revised from time to time) adopted by the Trust
Board (the ldquoValuation Proceduresrdquo) and in accordance with the 1940 Act A market
valuation generally means a valuation (i) obtained from an exchange an independent
pricing service (ldquoPricing Servicerdquo) or a major market maker (or dealer) or (ii) based on a
price quotation or other equivalent indication of value supplied by an exchange a Pricing
Service or a major market maker (or dealer) The information summarized below is
based on the Valuation Procedures as currently in effect however as noted above the
Valuation Procedures are amended from time to time and therefore such information is
subject to change
Certain securities including Floating Rate Debt Instruments in which the Fund
may invest will not be listed on any securities exchange or board of trade Such
securities will typically be bought and sold by institutional investors in individually
negotiated private transactions that function in many respects like an over-the-counter
SR-NASDAQ-2015-011 Amendment No 2 Page 16 of 64
secondary market although typically no formal market makers will exist Certain
securities particularly debt securities will have few or no trades or trade infrequently
and information regarding a specific security may not be widely available or may be
incomplete Accordingly determinations of the fair value of debt securities may be
based on infrequent and dated information Because there is less reliable objective data
available elements of judgment may play a greater role in valuation of debt securities
than for other types of securities Typically Floating Rate Debt Instruments and other
debt securities in which the Fund may invest (other than those described below) will be
valued using information provided by a Pricing Service Debt securities having a
remaining maturity of 60 days or less when purchased will be valued at cost adjusted for
amortization of premiums and accretion of discounts provided the Adviserrsquos pricing
committee (the ldquoPricing Committeerdquo) has determined that the use of amortized cost is an
appropriate reflection of fair value given market and issuer-specific conditions existing at
the time of the determination Overnight repurchase agreements will be valued at cost
and term repurchase agreements (ie those whose maturity exceeds seven days) will be
valued at the average of the bid quotations obtained daily from at least two recognized
dealers
Asset-backed and mortgage-backed securities will generally be valued by using a
Pricing Service If a Pricing Service does not cover a particular asset-backed or
mortgage-backed security or discontinues covering a particular asset-backed or
mortgage-backed security the security will be priced using broker quotes generally
provided by brokers that make or participate in markets in the security To derive values
Pricing Services and broker-dealers may use matrix pricing and valuation models as well
SR-NASDAQ-2015-011 Amendment No 2 Page 17 of 64
as recent market transactions for the same or similar assets As it deems appropriate the
Pricing Committee may determine that a Pricing Service price does not represent an
accurate value of an asset-backed or mortgage-backed security based on broker quotes it
receives a recent trade in the security by the Fund information from a portfolio manager
or other market information In the event that the Pricing Committee determines that the
Pricing Service price is unreliable or inaccurate based on such other information broker
quotes may be used Additionally if the Pricing Committee determines that the price of
an asset-backed or mortgage-backed security obtained from a Pricing Service and
available broker quotes is unreliable or inaccurate due to market conditions or other
reasons or if a Pricing Service price or broker quote is unavailable the security will be
valued using fair value pricing as described below
Equity securities listed on any exchange other than the Exchange will be valued at
the last sale price on the exchange on which they are principally traded on the business
day as of which such value is being determined Equity securities listed on the Exchange
will be valued at the official closing price on the business day as of which such value is
being determined If there has been no sale on such day or no official closing price in
the case of securities traded on the Exchange the securities will be valued using fair
value pricing as described below Equity securities traded on more than one securities
exchange will be valued at the last sale price or official closing price as applicable on
the business day as of which such value is being determined at the close of the exchange
representing the principal market for such securities
Exchange-traded options and futures contracts will be valued at the closing price
in the market where such contracts are principally traded
SR-NASDAQ-2015-011 Amendment No 2 Page 18 of 64
Certain securities including Floating Rate Debt Instruments in which the Fund
will invest will not be able to be priced by pre-established pricing methods Such
securities may be valued by the Trust Board or its delegate at fair value The use of fair
value pricing by the Fund will be governed by the Valuation Procedures and conducted in
accordance with the provisions of the 1940 Act Valuing the Fundrsquos securities using fair
value pricing will result in using prices for those securities that may differ from current
market valuations or official closing prices on the applicable exchange
Availability of Information
The Fundrsquos website (wwwftportfolioscom) which will be publicly available
prior to the public offering of Shares will include a form of the prospectus for the Fund
that may be downloaded The website will include the Sharesrsquo ticker CUSIP and
exchange information along with additional quantitative information updated on a daily
basis including for the Fund (1) daily trading volume the prior business dayrsquos reported
NAV and closing price mid-point of the bidask spread at the time of calculation of such
NAV (the ldquoBidAsk Pricerdquo)33 and a calculation of the premium and discount of the
BidAsk Price against the NAV and (2) data in chart format displaying the frequency
distribution of discounts and premiums of the daily BidAsk Price against the NAV
within appropriate ranges for each of the four previous calendar quarters On each
business day before commencement of trading in Shares in the Regular Market Session34
33 The BidAsk Price of the Fund will be determined using the mid-point of the highest bid and the lowest offer on the Exchange as of the time of calculation of the Fundrsquos NAV The records relating to BidAsk Prices will be retained by the Fund and its service providers
34 See Nasdaq Rule 4120(b)(4) (describing the three trading sessions on the Exchange (1) Pre-Market Session from 4 am to 930 am Eastern Time (2)
SR-NASDAQ-2015-011 Amendment No 2 Page 19 of 64
on the Exchange the Fund will disclose on its website the identities and quantities of the
portfolio of securities and other assets (the ldquoDisclosed Portfoliordquo as defined in Nasdaq
Rule 5735(c)(2)) held by the Fund that will form the basis for the Fundrsquos calculation of
NAV at the end of the business day 35 The Fundrsquos disclosure of derivative positions in
the Disclosed Portfolio will include information that market participants can use to value
these positions intraday On a daily basis the Fund will disclose on the Fundrsquos website
the following information regarding each portfolio holding as applicable to the type of
holding ticker symbol CUSIP number or other identifier if any a description of the
holding (including the type of holding) the identity of the security or other asset or
instrument underlying the holding if any for options the option strike price quantity
held (as measured by for example par value notional value or number of shares
contracts or units) maturity date if any coupon rate if any effective date if any market
value of the holding and percentage weighting of the holding in the Fundrsquos portfolio
The website information will be publicly available at no charge
In addition for the Fund an estimated value defined in Rule 5735(c)(3) as the
ldquoIntraday Indicative Valuerdquo that reflects an estimated intraday value of the Fundrsquos
Disclosed Portfolio will be disseminated Moreover the Intraday Indicative Value
Regular Market Session from 930 am to 4 pm or 415 pm Eastern Time and (3) Post-Market Session from 4 pm or 415 pm to 8 pm Eastern Time)
Under accounting procedures to be followed by the Fund trades made on the prior business day (ldquoTrdquo) will be booked and reflected in NAV on the current business day (ldquoT+1rdquo) Accordingly the Fund will be able to disclose at the beginning of the business day the portfolio that will form the basis for the NAV calculation at the end of the business day
35
SR-NASDAQ-2015-011 Amendment No 2 Page 20 of 64
available on the NASDAQ OMX Information LLC proprietary index data service36 will
be based upon the current value for the components of the Disclosed Portfolio and will be
updated and widely disseminated by one or more major market data vendors and broadly
displayed at least every 15 seconds during the Regular Market Session The Intraday
Indicative Value will be based on quotes and closing prices from the securitiesrsquo local
market and may not reflect events that occur subsequent to the local marketrsquos close
Premiums and discounts between the Intraday Indicative Value and the market price may
occur This should not be viewed as a ldquoreal timerdquo update of the NAV per Share of the
Fund which is calculated only once a day
The dissemination of the Intraday Indicative Value together with the Disclosed
Portfolio will allow investors to determine the value of the underlying portfolio of the
Fund on a daily basis and will provide a close estimate of that value throughout the
trading day
Investors will also be able to obtain the Fundrsquos Statement of Additional
Information (ldquoSAIrdquo) the Fundrsquos annual and semi-annual reports (together ldquoShareholder
Reportsrdquo) and its Form N-CSR and Form N-SAR filed twice a year The Fundrsquos SAI
and Shareholder Reports will be available free upon request from the Fund and those
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or
downloaded from the Commissionrsquos website at wwwsecgov Information regarding
market price and trading volume of the Shares will be continually available on a real-time
Currently the NASDAQ OMX Global Index Data Service (ldquoGIDSrdquo) is the NASDAQ OMX global index data feed service offering real-time updates daily summary messages and access to widely followed indexes and Intraday Indicative Values for ETFs GIDS provides investment professionals with the daily information needed to track or trade NASDAQ OMX indexes listed ETFs or third-party partner indexes and ETFs
36
SR-NASDAQ-2015-011 Amendment No 2 Page 21 of 64
basis throughout the day on brokersrsquo computer screens and other electronic services
Information regarding the previous dayrsquos closing price and trading volume information
for the Shares will be published daily in the financial section of newspapers Quotation
and last sale information for the Shares will be available via Nasdaq proprietary quote
and trade services as well as in accordance with the Unlisted Trading Privileges and the
Consolidated Tape Association (ldquoCTArdquo) plans for the Shares Quotation and last sale
information for the other ETFs in which the Fund will invest will be available via the
quote and trade services of their respective primary exchanges as well as in accordance
with the Unlisted Trading Privileges and the CTA plans as applicable Quotation and
last sale information for US exchange-traded options will be available via the Options
Price Reporting Authority Intraday executable price quotations on Floating Rate Debt
Instruments and other assets not traded on an exchange will be available from major
broker-dealer firms or market data vendors as well as from automated quotation systems
published or other public sources or online information services Additionally the Trade
Reporting and Compliance Engine (ldquoTRACErdquo) of the Financial Industry Regulatory
Authority (ldquoFINRArdquo) will be a source of price information for corporate bonds
privately-issued securities mortgage-backed securities and asset-backed securities to the
extent transactions in such securities are reported to TRACE37 For exchange-traded
assets intraday pricing information will be available directly from the applicable listing
exchange
Broker-dealers that are FINRA member firms have an obligation to report transactions in specified debt securities to TRACE to the extent required under applicable FINRA rules Generally such debt securities will have at issuance a maturity that exceeds one calendar year
37
SR-NASDAQ-2015-011 Amendment No 2 Page 22 of 64
Additional information regarding the Fund and the Shares including investment
strategies risks creation and redemption procedures fees Fund holdings disclosure
policies distributions and taxes will be included in the Registration Statement
Initial and Continued Listing
The Shares will be subject to Rule 5735 which sets forth the initial and continued
listing criteria applicable to Managed Fund Shares The Exchange represents that for
initial andor continued listing the Fund must be in compliance with Rule 10A-338 under
the Act A minimum of 100000 Shares will be outstanding at the commencement of
trading on the Exchange The Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the NAV and the
Disclosed Portfolio will be made available to all market participants at the same time
Trading Halts
With respect to trading halts the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading in the Shares of the Fund Nasdaq will
halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12) Trading may be
halted because of market conditions or for reasons that in the view of the Exchange
make trading in the Shares inadvisable These may include (1) the extent to which
trading is not occurring in the securities andor the other assets constituting the Disclosed
Portfolio of the Fund or (2) whether other unusual conditions or circumstances
detrimental to the maintenance of a fair and orderly market are present Trading in the
See 17 CFR 24010A-3 38
SR-NASDAQ-2015-011 Amendment No 2 Page 23 of 64
Shares also will be subject to Rule 5735(d)(2)(D) which sets forth circumstances under
which Shares of the Fund may be halted
Trading Rules
Nasdaq deems the Shares to be equity securities thus rendering trading in the
Shares subject to Nasdaqrsquos existing rules governing the trading of equity securities
Nasdaq will allow trading in the Shares from 400 am until 800 pm Eastern Time
The Exchange has appropriate rules to facilitate transactions in the Shares during all
trading sessions As provided in Nasdaq Rule 5735(b)(3) the minimum price variation
for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $001
Surveillance
The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws39 The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities laws
The surveillances referred to above generally focus on detecting securities trading
outside their normal patterns which could be indicative of manipulative or other violative
activity When such situations are detected surveillance analysis follows and
investigations are opened where appropriate to review the behavior of all relevant
parties for all relevant trading violations
FINRA surveils trading on the Exchange pursuant to a regulatory services agreement The Exchange is responsible for FINRArsquos performance under this regulatory services agreement
39
SR-NASDAQ-2015-011 Amendment No 2 Page 24 of 64
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 25 of 64
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
b Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
SR-NASDAQ-2015-011 Amendment No 2 Page 26 of 64
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
SR-NASDAQ-2015-011 Amendment No 2 Page 27 of 64
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
SR-NASDAQ-2015-011 Amendment No 2 Page 28 of 64
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
SR-NASDAQ-2015-011 Amendment No 2 Page 29 of 64
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
SR-NASDAQ-2015-011 Amendment No 2 Page 30 of 64
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
SR-NASDAQ-2015-011 Amendment No 2 Page 31 of 64
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
4 Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
5 Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received from Members Participants or Others
Written comments were neither solicited nor received
6 Extension of Time Period for Commission Action
The Exchange does not consent at this time to an extension of any time period for
Commission action
7 Basis for Summary Effectiveness Pursuant to Section 19(b)(3) or for Accelerated Effectiveness Pursuant to Section 19(b)(2)
Not applicable
8 Proposed Rule Change Based on Rules of Another Self-Regulatory Organization or of the Commission
Not applicable
9 Security-Based Swap Submissions Filed Pursuant to Section 3C of the Act
Not applicable
SR-NASDAQ-2015-011 Amendment No 2 Page 32 of 64
10 Advance Notices Filed Pursuant to Section 806(e) of the Payment Clearing and Settlement Supervision Act
Not applicable
11 Exhibits
1 Completed notice of proposed rule change for publication in the Federal
Register
SR-NASDAQ-2015-011 Amendment No 2 Page 33 of 64
EXHIBIT 1
SECURITIES AND EXCHANGE COMMISSION (Release No 34shy File No SR-NASDAQ-2015-011)
April __ 2015
Self-Regulatory Organizations The NASDAQ Stock Market LLC Notice of Filing of Proposed Rule Change Relating to the Listing and Trading of the Shares of the First Trust Strategic Floating Rate ETF of First Trust Exchange-Traded Fund IV
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (ldquoActrdquo)1 and
Rule 19b-4 thereunder2 notice is hereby given that on February 12 2015 The NASDAQ
Stock Market LLC (ldquoNasdaqrdquo or the ldquoExchangerdquo) filed with the Securities and Exchange
Commission (ldquoCommissionrdquo) the proposed rule change as described in in Items I II and
III below which Items have been prepared by Nasdaq On April 6 2015 Nasdaq filed
Amendment No 1 which replaced the text of the original filing in its entirety On April
15 2015 Nasdaq filed Amendment No 2 which replaced the text of the original filing in
its entirety The Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons
I Self-Regulatory Organizationrsquos Statement of the Terms of Substance of the Proposed Rule Change
Nasdaq proposes to list and trade the shares of the First Trust Strategic Floating
Rate ETF (the ldquoFundrdquo) of the First Trust Strategic Floating Rate ETF (the ldquoFundrdquo) of
First Trust Exchange-Traded Fund IV (the ldquoTrustrdquo) under Nasdaq Rule 5735 (ldquoManaged
1 15 USC 78s(b)(1)
2 17 CFR 24019b-4
SR-NASDAQ-2015-011 Amendment No 2 Page 34 of 64
Fund Sharesrdquo)3 The shares of the Fund are collectively referred to herein as the
ldquoSharesrdquo
The text of the proposed rule change is available at
httpnasdaqcchwallstreetcom at Nasdaqrsquos principal office and at the Commissionrsquos
Public Reference Room
II Self-Regulatory Organizationrsquos Statement of the Purpose of and Statutory Basis for the Proposed Rule Change
In its filing with the Commission Nasdaq included statements concerning the
purpose of and basis for the proposed rule change The text of these statements may be
examined at the places specified in Item IV below Nasdaq has prepared summaries set
forth in Sections A B and C below of the most significant aspects of such statements
A Self-Regulatory Organizationrsquos Statement of the Purpose of and Statutory Basis for the Proposed Rule Change
1 Purpose
The Exchange proposes to list and trade the Shares of the Fund under Nasdaq
Rule 5735 which governs the listing and trading of Managed Fund Shares4 on the
3 The Commission approved Nasdaq Rule 5735 in Securities Exchange Act Release No 57962 (June 13 2008) 73 FR 35175 (June 20 2008) (SR-NASDAQ-2008shy039) There are already multiple actively-managed funds listed on the Exchange see eg Securities Exchange Act Release Nos 69464 (April 26 2013) 78 FR 25774 (May 2 2013) (SR-NASDAQ-2013-036) (order approving listing and trading of First Trust Senior Loan Fund) 68972 (February 22 2013) 78 FR 13721 (February 28 2013) (SR-NASDAQ-2012-147) (order approving listing and trading of First Trust High Yield LongShort ETF) 66489 (February 29 2012) 77 FR 13379 (March 6 2012) (SR-NASDAQ-2012-004) (order approving listing and trading of WisdomTree Emerging Markets Corporate Bond Fund) The Exchange believes the proposed rule change raises no significant issues not previously addressed in those prior Commission orders
4 A Managed Fund Share is a security that represents an interest in an investment company registered under the Investment Company Act of 1940 (15 USC 80ashy
SR-NASDAQ-2015-011 Amendment No 2 Page 35 of 64
Exchange The Fund will be an actively-managed exchange-traded fund (ldquoETFrdquo) The
Shares will be offered by the Trust which was established as a Massachusetts business
trust on September 15 20105 The Trust is registered with the Commission as an
investment company and has filed a registration statement on Form N-1A (ldquoRegistration
Statementrdquo) with the Commission6 The Fund will be a series of the Trust The Fund
intends to qualify each year as a regulated investment company (ldquoRICrdquo) under
Subchapter M of the Internal Revenue Code of 1986 as amended
First Trust Advisors LP will be the investment adviser (ldquoAdviserrdquo) to the Fund
First Trust Portfolios LP (the ldquoDistributorrdquo) will be the principal underwriter and
distributor of the Fundrsquos Shares The Bank of New York Mellon Corporation (ldquoBNYrdquo)
will act as the administrator accounting agent custodian and transfer agent to the Fund
1) (the ldquo1940 Actrdquo) organized as an open-end investment company or similar entity that invests in a portfolio of securities selected by its investment adviser consistent with its investment objectives and policies In contrast an open-end investment company that issues Index Fund Shares listed and traded on the Exchange under Nasdaq Rule 5705 seeks to provide investment results that correspond generally to the price and yield performance of a specific foreign or domestic stock index fixed income securities index or combination thereof
5 The Commission has issued an order upon which the Trust may rely granting certain exemptive relief under the 1940 Act See Investment Company Act Release No 30029 (April 10 2012) (File No 812-13795) (the ldquoExemptive Reliefrdquo) In addition the Commission has issued no-action relief upon which the Trust may rely pertaining to the Fundrsquos ability to invest in derivatives notwithstanding certain representations in the application for the Exemptive Relief See Commission No-Action Letter (December 6 2012)
6 See Post-Effective Amendment No 104 to Registration Statement on Form N-1A for the Trust dated January 29 2015 (File Nos 333-174332 and 811-22559) The descriptions of the Fund and the Shares contained herein are based in part on information in the Registration Statement
7
SR-NASDAQ-2015-011 Amendment No 2 Page 36 of 64
Paragraph (g) of Rule 5735 provides that if the investment adviser to the
investment company issuing Managed Fund Shares is affiliated with a broker-dealer
such investment adviser shall erect a ldquofire wallrdquo between the investment adviser and the
broker-dealer with respect to access to information concerning the composition andor
changes to such investment company portfolio7 In addition paragraph (g) further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio Rule 5735(g) is similar
to Nasdaq Rule 5705(b)(5)(A)(i) however paragraph (g) in connection with the
establishment of a ldquofire wallrdquo between the investment adviser and the broker-dealer
reflects the applicable open-end fundrsquos portfolio not an underlying benchmark index as
is the case with index-based funds The Adviser is not a broker-dealer although it is
affiliated with the Distributor a broker-dealer The Adviser has implemented a fire wall
An investment adviser to an open-end fund is required to be registered under the Investment Advisers Act of 1940 (the ldquoAdvisers Actrdquo) As a result the Adviser and its related personnel are subject to the provisions of Rule 204A-1 under the Advisers Act relating to codes of ethics This Rule requires investment advisers to adopt a code of ethics that reflects the fiduciary nature of the relationship to clients as well as compliance with other applicable securities laws Accordingly procedures designed to prevent the communication and misuse of non-public information by an investment adviser must be consistent with Rule 204A-1 under the Advisers Act In addition Rule 206(4)-7 under the Advisers Act makes it unlawful for an investment adviser to provide investment advice to clients unless such investment adviser has (i) adopted and implemented written policies and procedures reasonably designed to prevent violation by the investment adviser and its supervised persons of the Advisers Act and the Commission rules adopted thereunder (ii) implemented at a minimum an annual review regarding the adequacy of the policies and procedures established pursuant to subparagraph (i) above and the effectiveness of their implementation and (iii) designated an individual (who is a supervised person) responsible for administering the policies and procedures adopted under subparagraph (i) above
8
SR-NASDAQ-2015-011 Amendment No 2 Page 37 of 64
with respect to its broker-dealer affiliate regarding access to information concerning the
composition andor changes to the portfolio In addition personnel who make decisions
on the Fundrsquos portfolio composition will be subject to procedures designed to prevent the
use and dissemination of material non-public information regarding the Fundrsquos portfolio
In the event (a) the Adviser becomes or becomes newly affiliated with a broker-dealer
or (b) any new adviser or sub-adviser is a registered broker-dealer or becomes affiliated
with another broker-dealer it will implement a fire wall with respect to its relevant
personnel andor such broker-dealer affiliate as applicable regarding access to
information concerning the composition andor changes to the portfolio and will be
subject to procedures designed to prevent the use and dissemination of material
non-public information regarding such portfolio The Fund does not currently intend to
use a sub-adviser
First Trust Strategic Floating Rate ETF
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions8 at least 80 of its
The term ldquounder normal market conditionsrdquo as used herein includes but is not limited to the absence of adverse market economic political or other conditions including extreme volatility or trading halts in the fixed income markets or the financial markets generally operational issues causing dissemination of inaccurate market information or force majeure type events such as systems failure natural or man-made disaster act of God armed conflict act of terrorism riot or labor disruption or any similar intervening circumstance For temporary defensive purposes during the initial invest-up period and during periods of high cash inflows or outflows the Fund may depart from its principal investment strategies for example it may hold a higher than normal proportion of its assets in cash During such periods the Fund may not be able to achieve its investment objective The Fund may adopt a defensive strategy when the Adviser believes securities in which the Fund normally invests have elevated risks due to political or economic factors and in other extraordinary circumstances
SR-NASDAQ-2015-011 Amendment No 2 Page 38 of 64
net assets in a portfolio of the following types of floating-rate9 debt instruments issued by
US and non-US public- and private-sector entities floating-rate corporate10 and
government bonds and notes floating-rate agency securities 11 floating-rate instruments
of non-US issuers floating-rate privately-issued securities 12 floating-rate asset-backed
securities 13 floating-rate mortgage-backed securities14 floating-rate loans 15 and
9 For the avoidance of doubt the term ldquofloating-raterdquo shall also include similar terms such as ldquovariable-raterdquo and ldquoadjustable-raterdquo
10 The Adviser expects that under normal market conditions generally for a corporate bond to be considered as an eligible investment after taking into account such an investment at least 75 of the Fundrsquos net assets that are invested in floating-rate corporate bonds and as described below fixed-rate corporate bonds (in the aggregate) will be comprised of corporate bonds that have at the time of original issuance $100 million or more par amount outstanding
11 ldquoAgency securitiesrdquo for these purposes generally includes securities issued by the following entities Government National Mortgage Association (Ginnie Mae) Federal National Mortgage Association (Fannie Mae) Federal Home Loan Banks (FHLBanks) Federal Home Loan Mortgage Corporation (Freddie Mac) Farm Credit System (FCS) Farm Credit Banks (FCBanks) Student Loan Marketing Association (Sallie Mae) Resolution Funding Corporation (REFCORP) Financing Corporation (FICO) and the Farm Credit System (FCS) Financial Assistance Corporation (FAC) Agency securities can include but are not limited to mortgage-backed securities
12 ldquoPrivately-issued securitiesrdquo for these purposes generally includes Rule 144A securities other than mortgage-backed Rule 144A securities Under normal market conditions privately-issued securities will have at the time of original issuance $100 million or more principal amount outstanding to be considered eligible investments
13 Asset-backed securities are securities that are backed by a pool of assets The Fund currently intends to invest in asset-backed securities that are consumer asset-backed securities
14 Mortgage-backed securities which are securities that directly or indirectly represent a participation in or are secured by and payable from mortgage loans on real property will consist of (1) residential mortgage-backed securities (ldquoRMBSrdquo) (2) commercial mortgage-backed securities (ldquoCMBSrdquo) (3) stripped mortgage-backed securities (ldquoSMBSrdquo) which are mortgage-backed securities
SR-NASDAQ-2015-011 Amendment No 2 Page 39 of 64
investment companies16 (including investment companies advised by the Adviser) that
invest primarily in the foregoing types of debt instruments17 (collectively ldquoFloating Rate
Debt Instrumentsrdquo)
where mortgage payments are divided between paying the loanrsquos principal and paying the loanrsquos interest (4) collateralized mortgage obligations (ldquoCMOsrdquo) and real estate mortgage investment conduits (ldquoREMICsrdquo) which are mortgage-backed securities that are divided into multiple classes with each class being entitled to a different share of the principal and interest payments received from the pool of underlying assets
15 The floating-rate loans in which the Fund will invest will represent amounts borrowed by companies or other entities from banks and other lenders and a significant portion of such floating-rate loans may be rated below investment grade or unrated Floating-rate loans held by the Fund may be senior or subordinate obligations of the borrower and may or may not be secured by collateral First lien senior secured floating-rate loans are referred to herein as ldquosenior loansrdquo Floating-rate loans that are not senior loans (ie unsecured floating-rate loans and secured floating-rate loans that are not first lien floating-rate loans) are referred to herein as ldquojunior loansrdquo The Fund will generally invest in floating-rate loans that the Adviser deems to be liquid with readily available prices notwithstanding the foregoing the Fund may invest in floating-rate loans that are deemed illiquid so long as the Fund complies with the 15 limitation on investments of its net assets in illiquid assets described below under ldquoInvestment Restrictionsrdquo
16 The Fund currently anticipates investing only in registered open-end investment companies that are listed and traded in the US on registered exchanges (ie other ETFs) An ETF is an investment company registered under the 1940 Act that holds a portfolio of securities Many ETFs are designed to track the performance of a securities index including industry sector country and region indexes The Fund may invest in the securities of ETFs in excess of the limits imposed under the 1940 Act pursuant to exemptive orders obtained by other ETFs and their sponsors from the Commission In addition the Fund may invest in the securities of certain investment companies in excess of the limits imposed under the 1940 Act pursuant to an exemptive order obtained by the Trust and the Adviser from the Commission See Investment Company Act Release No 30377 (February 5 2013) (File No 812-13895) The ETFs in which the Fund may invest include Index Fund Shares (as described in Nasdaq Rule 5705) Portfolio Depository Receipts (as described in Nasdaq Rule 5705) and Managed Fund Shares (as described in Nasdaq Rule 5735) While the Fund may invest in inverse ETFs the Fund will not invest in leveraged or inverse leveraged (eg 2X or -3X) ETFs
SR-NASDAQ-2015-011 Amendment No 2 Page 40 of 64
At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade To be considered
ldquoinvestment graderdquo under normal market conditions rated Floating Rate Debt
Instruments will carry at the time of purchase a rating in the highest four rating
categories of at least one nationally recognized statistical ratings organization
(ldquoNRSROrdquo) (eg BBB- or higher by Standard amp Poorrsquos Ratings Services (ldquoSampPrdquo)
andor Fitch Ratings (ldquoFitchrdquo) or Baa3 or higher by Moodyrsquos Investors Service Inc
(ldquoMoodyrsquosrdquo)18 For unrated securities to be considered ldquoinvestment graderdquo under normal
market conditions such securities will be determined at the time of purchase to be of
comparable quality19 by the Adviser The Fund may invest up to 35 of its net assets in
securities that are at the time of investment rated below investment grade by each
NRSRO rating such securities (or securities that are unrated and determined by the
17 The liquidity of a security especially in the case of asset-backed and mortgage-backed securities will be a substantial factor in the Fundrsquos security selection process Consistent with the discussion below under ldquoInvestment Restrictionsrdquo the Fund will not purchase any Floating Rate Debt Instruments (including asset-backed securities and mortgage-backed securities) that in the Adviserrsquos opinion are illiquid if as a result more than 15 of the value of the Fundrsquos net assets will be invested in illiquid assets
18 For the avoidance of doubt if a security is rated by multiple NRSROs and receives different ratings the Fund will treat the security as being rated in the highest rating category received from an NRSRO
19 Comparable quality of unrated securities will be determined by the Adviser based on fundamental credit analysis of the unrated security and comparable NRSRO-rated securities On a best efforts basis the Adviser will attempt to make a rating determination based on publicly available data In making a ldquocomparable qualityrdquo determination the Adviser may consider for example whether the issuer of the security has issued other rated securities the nature and provisions of the relevant security whether the obligations under the relevant security are guaranteed by another entity and the rating of such guarantor (if any) relevant cash flows macroeconomic analysis andor sector or industry analysis
SR-NASDAQ-2015-011 Amendment No 2 Page 41 of 64
Adviser to be of comparable quality) commonly referred to as ldquohigh yieldrdquo or ldquojunkrdquo
bonds If subsequent to purchase by the Fund a security held by the Fund experiences a
decline in credit quality and falls below investment grade the Fund may continue to hold
the security and it will not cause the Fund to violate the 35 investment limitation
however the security will be taken into account for purposes of determining whether
purchases of additional securities will cause the Fund to violate such limitation
The Fund will limit its investments in asset-backed securities (excluding agency
mortgage-backed securities) and non-agency mortgage-backed securities (in the
aggregate) to 20 of its net assets20 In addition the Fund will limit its investments in
junior loans to 20 of its net assets
The Fund will hold debt securities (including in the aggregate Floating Rate
Debt Instruments and the fixed-rate debt securities described below) of at least 13
non-affiliated issuers
Other Investments
Under normal market conditions the Fund will invest primarily in the Floating
Rate Debt Instruments described above to meet its investment objective In addition the
Fund may invest up to 20 of its net assets in the following types of fixed-rate debt
securities corporate21 and government bonds and notes agency securities22 instruments
20 For the avoidance of doubt there is no limitation on the Fundrsquos investments in agency mortgage-backed securities
21 See footnote 10 above
22 See footnote 11 above
SR-NASDAQ-2015-011 Amendment No 2 Page 42 of 64
of non-US issuers in developed markets privately-issued securities 23 asset-backed
securities 24 mortgage-backed securities 25 municipal bonds money market securities26
and investment companies27 (including investment companies advised by the Adviser)
that invest primarily in the foregoing types of debt securities
Further to pursue its investment objective the Fund may invest up to 20 of the
value of its net assets in exchange-listed options on US Treasury futures contracts and
exchange-listed US Treasury futures contracts28 The use of these derivative
transactions may allow the Fund to obtain net long or short exposures to selected interest
rates These derivatives may also be used to hedge risks including interest rate risks and
credit risks associated with the Fundrsquos portfolio investments The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
23 See footnote 12 above
24 See footnote 13 above
25 See footnote 14 above
26 ldquoMoney market securitiesrdquo for these purposes generally includes short-term high-quality obligations issued or guaranteed by the US Treasury or the agencies or instrumentalities of the US government short-term high-quality securities issued or guaranteed by non-US governments agencies and instrumentalities repurchase agreements commercial paper (both asset-backed and non-assetshybacked) and deposits and other obligations of US and non-US banks and financial institutions
27 See footnote 16 above
28 At least 90 of the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be invested in instruments that trade in markets that are members of the Intermarket Surveillance Group (ldquoISGrdquo) (see footnote 40 below) or are parties to a comprehensive surveillance sharing agreement with the Exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 43 of 64
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index
Investment Restrictions
The Fund will not invest 25 or more of the value of its total assets in securities
of issuers in any one industry This restriction does not apply to (a) obligations issued or
guaranteed by the US government its agencies or instrumentalities or (b) securities of
other investment companies29
The Fund may hold up to an aggregate amount of 15 of its net assets in illiquid
assets (calculated at the time of investment) including Rule 144A securities deemed
illiquid by the Adviser30 The Fund will monitor its portfolio liquidity on an ongoing
basis to determine whether in light of current circumstances an adequate level of
liquidity is being maintained and will consider taking appropriate steps in order to
maintain adequate liquidity if through a change in values net assets or other
circumstances more than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid
assets include securities subject to contractual or other restrictions on resale and other
29 See Form N-1A Item 9 The Commission has taken the position that a fund is concentrated if it invests more than 25 of the value of its total assets in any one industry See eg Investment Company Act Release No 9011 (October 30 1975) 40 FR 54241 (November 21 1975)
30 In reaching liquidity decisions the Adviser may consider the following factors the frequency of trades and quotes for the security the number of dealers wishing to purchase or sell the security and the number of other potential purchasers dealer undertakings to make a market in the security and the nature of the security and the nature of the marketplace in which it trades (eg the time needed to dispose of the security the method of soliciting offers and the mechanics of transfer)
SR-NASDAQ-2015-011 Amendment No 2 Page 44 of 64
instruments that lack readily available markets as determined in accordance with
Commission staff guidance31
The Fund will not invest in non-US equity securities
Creation and Redemption of Shares
The Fund will issue and redeem Shares on a continuous basis at net asset value
(ldquoNAVrdquo)32 only in large blocks of Shares (ldquoCreation Unitsrdquo) in transactions with
authorized participants generally including broker-dealers and large institutional
investors (ldquoAuthorized Participantsrdquo) Creation Units generally will consist of 50000
Shares although this may change from time to time Creation Units however are not
expected to consist of less than 50000 Shares As described in the Registration
Statement and consistent with the Exemptive Relief the Fund will issue and redeem
Creation Units in exchange for an in-kind portfolio of instruments andor cash in lieu of
31 The Commission has stated that long-standing Commission guidelines have required open-end funds to hold no more than 15 of their net assets in illiquid securities and other illiquid assets See Investment Company Act Release No 28193 (March 11 2008) 73 FR 14618 (March 18 2008) footnote 34 See also Investment Company Act Release No 5847 (October 21 1969) 35 FR 19989 (December 31 1970) (Statement Regarding ldquoRestricted Securitiesrdquo) Investment Company Act Release No 18612 (March 12 1992) 57 FR 9828 (March 20 1992) (Revisions of Guidelines to Form N-1A) A fundrsquos portfolio security is illiquid if it cannot be disposed of in the ordinary course of business within seven days at approximately the value ascribed to it by the fund See Investment Company Act Release No 14983 (March 12 1986) 51 FR 9773 (March 21 1986) (adopting amendments to Rule 2a-7 under the 1940 Act) Investment Company Act Release No 17452 (April 23 1990) 55 FR 17933 (April 30 1990) (adopting Rule 144A under the Securities Act of 1933)
32 The NAV of the Fundrsquos Shares generally will be calculated once daily Monday through Friday as of the close of regular trading on the New York Stock Exchange generally 400 pm Eastern Time (the ldquoNAV Calculation Timerdquo) NAV per Share will be calculated by dividing the Fundrsquos net assets by the number of Fund Shares outstanding For more information regarding the valuation of Fund investments in calculating the Fundrsquos NAV see the Registration Statement
SR-NASDAQ-2015-011 Amendment No 2 Page 45 of 64
such instruments (the ldquoCreation Basketrdquo) In addition if there is a difference between the
NAV attributable to a Creation Unit and the market value of the Creation Basket
exchanged for the Creation Unit the party conveying instruments with the lower value
will pay to the other an amount in cash equal to the difference (referred to as the ldquoCash
Componentrdquo)
Creations and redemptions must be made by or through an Authorized Participant
that has executed an agreement that has been agreed to by the Distributor and BNY with
respect to creations and redemptions of Creation Units All standard orders to create
Creation Units must be received by the transfer agent no later than the closing time of the
regular trading session on the New York Stock Exchange (ordinarily 400 pm Eastern
Time) (the ldquoClosing Timerdquo) in each case on the date such order is placed in order for the
creation of Creation Units to be effected based on the NAV of Shares as next determined
on such date after receipt of the order in proper form Shares may be redeemed only in
Creation Units at their NAV next determined after receipt not later than the Closing Time
of a redemption request in proper form by the Fund through the transfer agent and only
on a business day
The Fundrsquos custodian through the National Securities Clearing Corporation will
make available on each business day prior to the opening of business of the Exchange
the list of the names and quantities of the instruments comprising the Creation Basket as
well as the estimated Cash Component (if any) for that day The published Creation
Basket will apply until a new Creation Basket is announced on the following business
day prior to commencement of trading in the Shares
SR-NASDAQ-2015-011 Amendment No 2 Page 46 of 64
Net Asset Value
The Fundrsquos NAV will be determined as of the close of trading (normally
400 pm Eastern Time) on each day the New York Stock Exchange is open for
business NAV will be calculated for the Fund by taking the market price of the Fundrsquos
total assets including interest or dividends accrued but not yet collected less all
liabilities and dividing such amount by the total number of Shares outstanding The
result rounded to the nearest cent will be the NAV per Share All valuations will be
subject to review by the Board of Trustees of the Trust (ldquoTrust Boardrdquo) or its delegate
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with valuation procedures (which may be revised from time to time) adopted by the Trust
Board (the ldquoValuation Proceduresrdquo) and in accordance with the 1940 Act A market
valuation generally means a valuation (i) obtained from an exchange an independent
pricing service (ldquoPricing Servicerdquo) or a major market maker (or dealer) or (ii) based on a
price quotation or other equivalent indication of value supplied by an exchange a Pricing
Service or a major market maker (or dealer) The information summarized below is
based on the Valuation Procedures as currently in effect however as noted above the
Valuation Procedures are amended from time to time and therefore such information is
subject to change
Certain securities including Floating Rate Debt Instruments in which the Fund
may invest will not be listed on any securities exchange or board of trade Such
securities will typically be bought and sold by institutional investors in individually
negotiated private transactions that function in many respects like an over-the-counter
SR-NASDAQ-2015-011 Amendment No 2 Page 47 of 64
secondary market although typically no formal market makers will exist Certain
securities particularly debt securities will have few or no trades or trade infrequently
and information regarding a specific security may not be widely available or may be
incomplete Accordingly determinations of the fair value of debt securities may be
based on infrequent and dated information Because there is less reliable objective data
available elements of judgment may play a greater role in valuation of debt securities
than for other types of securities Typically Floating Rate Debt Instruments and other
debt securities in which the Fund may invest (other than those described below) will be
valued using information provided by a Pricing Service Debt securities having a
remaining maturity of 60 days or less when purchased will be valued at cost adjusted for
amortization of premiums and accretion of discounts provided the Adviserrsquos pricing
committee (the ldquoPricing Committeerdquo) has determined that the use of amortized cost is an
appropriate reflection of fair value given market and issuer-specific conditions existing at
the time of the determination Overnight repurchase agreements will be valued at cost
and term repurchase agreements (ie those whose maturity exceeds seven days) will be
valued at the average of the bid quotations obtained daily from at least two recognized
dealers
Asset-backed and mortgage-backed securities will generally be valued by using a
Pricing Service If a Pricing Service does not cover a particular asset-backed or
mortgage-backed security or discontinues covering a particular asset-backed or
mortgage-backed security the security will be priced using broker quotes generally
provided by brokers that make or participate in markets in the security To derive values
Pricing Services and broker-dealers may use matrix pricing and valuation models as well
SR-NASDAQ-2015-011 Amendment No 2 Page 48 of 64
as recent market transactions for the same or similar assets As it deems appropriate the
Pricing Committee may determine that a Pricing Service price does not represent an
accurate value of an asset-backed or mortgage-backed security based on broker quotes it
receives a recent trade in the security by the Fund information from a portfolio manager
or other market information In the event that the Pricing Committee determines that the
Pricing Service price is unreliable or inaccurate based on such other information broker
quotes may be used Additionally if the Pricing Committee determines that the price of
an asset-backed or mortgage-backed security obtained from a Pricing Service and
available broker quotes is unreliable or inaccurate due to market conditions or other
reasons or if a Pricing Service price or broker quote is unavailable the security will be
valued using fair value pricing as described below
Equity securities listed on any exchange other than the Exchange will be valued at
the last sale price on the exchange on which they are principally traded on the business
day as of which such value is being determined Equity securities listed on the Exchange
will be valued at the official closing price on the business day as of which such value is
being determined If there has been no sale on such day or no official closing price in
the case of securities traded on the Exchange the securities will be valued using fair
value pricing as described below Equity securities traded on more than one securities
exchange will be valued at the last sale price or official closing price as applicable on
the business day as of which such value is being determined at the close of the exchange
representing the principal market for such securities
Exchange-traded options and futures contracts will be valued at the closing price
in the market where such contracts are principally traded
SR-NASDAQ-2015-011 Amendment No 2 Page 49 of 64
Certain securities including Floating Rate Debt Instruments in which the Fund
will invest will not be able to be priced by pre-established pricing methods Such
securities may be valued by the Trust Board or its delegate at fair value The use of fair
value pricing by the Fund will be governed by the Valuation Procedures and conducted in
accordance with the provisions of the 1940 Act Valuing the Fundrsquos securities using fair
value pricing will result in using prices for those securities that may differ from current
market valuations or official closing prices on the applicable exchange
Availability of Information
The Fundrsquos website (wwwftportfolioscom) which will be publicly available
prior to the public offering of Shares will include a form of the prospectus for the Fund
that may be downloaded The website will include the Sharesrsquo ticker CUSIP and
exchange information along with additional quantitative information updated on a daily
basis including for the Fund (1) daily trading volume the prior business dayrsquos reported
NAV and closing price mid-point of the bidask spread at the time of calculation of such
NAV (the ldquoBidAsk Pricerdquo)33 and a calculation of the premium and discount of the
BidAsk Price against the NAV and (2) data in chart format displaying the frequency
distribution of discounts and premiums of the daily BidAsk Price against the NAV
within appropriate ranges for each of the four previous calendar quarters On each
business day before commencement of trading in Shares in the Regular Market Session34
33 The BidAsk Price of the Fund will be determined using the mid-point of the highest bid and the lowest offer on the Exchange as of the time of calculation of the Fundrsquos NAV The records relating to BidAsk Prices will be retained by the Fund and its service providers
34 See Nasdaq Rule 4120(b)(4) (describing the three trading sessions on the Exchange (1) Pre-Market Session from 4 am to 930 am Eastern Time (2)
SR-NASDAQ-2015-011 Amendment No 2 Page 50 of 64
on the Exchange the Fund will disclose on its website the identities and quantities of the
portfolio of securities and other assets (the ldquoDisclosed Portfoliordquo as defined in Nasdaq
Rule 5735(c)(2)) held by the Fund that will form the basis for the Fundrsquos calculation of
NAV at the end of the business day 35 The Fundrsquos disclosure of derivative positions in
the Disclosed Portfolio will include information that market participants can use to value
these positions intraday On a daily basis the Fund will disclose on the Fundrsquos website
the following information regarding each portfolio holding as applicable to the type of
holding ticker symbol CUSIP number or other identifier if any a description of the
holding (including the type of holding) the identity of the security or other asset or
instrument underlying the holding if any for options the option strike price quantity
held (as measured by for example par value notional value or number of shares
contracts or units) maturity date if any coupon rate if any effective date if any market
value of the holding and percentage weighting of the holding in the Fundrsquos portfolio
The website information will be publicly available at no charge
In addition for the Fund an estimated value defined in Rule 5735(c)(3) as the
ldquoIntraday Indicative Valuerdquo that reflects an estimated intraday value of the Fundrsquos
Disclosed Portfolio will be disseminated Moreover the Intraday Indicative Value
Regular Market Session from 930 am to 4 pm or 415 pm Eastern Time and (3) Post-Market Session from 4 pm or 415 pm to 8 pm Eastern Time)
Under accounting procedures to be followed by the Fund trades made on the prior business day (ldquoTrdquo) will be booked and reflected in NAV on the current business day (ldquoT+1rdquo) Accordingly the Fund will be able to disclose at the beginning of the business day the portfolio that will form the basis for the NAV calculation at the end of the business day
35
SR-NASDAQ-2015-011 Amendment No 2 Page 51 of 64
available on the NASDAQ OMX Information LLC proprietary index data service36 will
be based upon the current value for the components of the Disclosed Portfolio and will be
updated and widely disseminated by one or more major market data vendors and broadly
displayed at least every 15 seconds during the Regular Market Session The Intraday
Indicative Value will be based on quotes and closing prices from the securitiesrsquo local
market and may not reflect events that occur subsequent to the local marketrsquos close
Premiums and discounts between the Intraday Indicative Value and the market price may
occur This should not be viewed as a ldquoreal timerdquo update of the NAV per Share of the
Fund which is calculated only once a day
The dissemination of the Intraday Indicative Value together with the Disclosed
Portfolio will allow investors to determine the value of the underlying portfolio of the
Fund on a daily basis and will provide a close estimate of that value throughout the
trading day
Investors will also be able to obtain the Fundrsquos Statement of Additional
Information (ldquoSAIrdquo) the Fundrsquos annual and semi-annual reports (together ldquoShareholder
Reportsrdquo) and its Form N-CSR and Form N-SAR filed twice a year The Fundrsquos SAI
and Shareholder Reports will be available free upon request from the Fund and those
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or
downloaded from the Commissionrsquos website at wwwsecgov Information regarding
Currently the NASDAQ OMX Global Index Data Service (ldquoGIDSrdquo) is the NASDAQ OMX global index data feed service offering real-time updates daily summary messages and access to widely followed indexes and Intraday Indicative Values for ETFs GIDS provides investment professionals with the daily information needed to track or trade NASDAQ OMX indexes listed ETFs or third-party partner indexes and ETFs
36
SR-NASDAQ-2015-011 Amendment No 2 Page 52 of 64
market price and trading volume of the Shares will be continually available on a real-time
basis throughout the day on brokersrsquo computer screens and other electronic services
Information regarding the previous dayrsquos closing price and trading volume information
for the Shares will be published daily in the financial section of newspapers Quotation
and last sale information for the Shares will be available via Nasdaq proprietary quote
and trade services as well as in accordance with the Unlisted Trading Privileges and the
Consolidated Tape Association (ldquoCTArdquo) plans for the Shares Quotation and last sale
information for the other ETFs in which the Fund will invest will be available via the
quote and trade services of their respective primary exchanges as well as in accordance
with the Unlisted Trading Privileges and the CTA plans as applicable Quotation and
last sale information for US exchange-traded options will be available via the Options
Price Reporting Authority Intraday executable price quotations on Floating Rate Debt
Instruments and other assets not traded on an exchange will be available from major
broker-dealer firms or market data vendors as well as from automated quotation systems
published or other public sources or online information services Additionally the Trade
Reporting and Compliance Engine (ldquoTRACErdquo) of the Financial Industry Regulatory
Authority (ldquoFINRArdquo) will be a source of price information for corporate bonds
privately-issued securities mortgage-backed securities and asset-backed securities to the
extent transactions in such securities are reported to TRACE37 For exchange-traded
Broker-dealers that are FINRA member firms have an obligation to report transactions in specified debt securities to TRACE to the extent required under applicable FINRA rules Generally such debt securities will have at issuance a maturity that exceeds one calendar year
37
SR-NASDAQ-2015-011 Amendment No 2 Page 53 of 64
assets intraday pricing information will be available directly from the applicable listing
exchange
Additional information regarding the Fund and the Shares including investment
strategies risks creation and redemption procedures fees Fund holdings disclosure
policies distributions and taxes will be included in the Registration Statement
Initial and Continued Listing
The Shares will be subject to Rule 5735 which sets forth the initial and continued
listing criteria applicable to Managed Fund Shares The Exchange represents that for
initial andor continued listing the Fund must be in compliance with Rule 10A-338 under
the Act A minimum of 100000 Shares will be outstanding at the commencement of
trading on the Exchange The Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the NAV and the
Disclosed Portfolio will be made available to all market participants at the same time
Trading Halts
With respect to trading halts the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading in the Shares of the Fund Nasdaq will
halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12) Trading may be
halted because of market conditions or for reasons that in the view of the Exchange
make trading in the Shares inadvisable These may include (1) the extent to which
trading is not occurring in the securities andor the other assets constituting the Disclosed
Portfolio of the Fund or (2) whether other unusual conditions or circumstances
See 17 CFR 24010A-3 38
SR-NASDAQ-2015-011 Amendment No 2 Page 54 of 64
detrimental to the maintenance of a fair and orderly market are present Trading in the
Shares also will be subject to Rule 5735(d)(2)(D) which sets forth circumstances under
which Shares of the Fund may be halted
Trading Rules
Nasdaq deems the Shares to be equity securities thus rendering trading in the
Shares subject to Nasdaqrsquos existing rules governing the trading of equity securities
Nasdaq will allow trading in the Shares from 400 am until 800 pm Eastern Time
The Exchange has appropriate rules to facilitate transactions in the Shares during all
trading sessions As provided in Nasdaq Rule 5735(b)(3) the minimum price variation
for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $001
Surveillance
The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws39 The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities laws
The surveillances referred to above generally focus on detecting securities trading
outside their normal patterns which could be indicative of manipulative or other violative
activity When such situations are detected surveillance analysis follows and
FINRA surveils trading on the Exchange pursuant to a regulatory services agreement The Exchange is responsible for FINRArsquos performance under this regulatory services agreement
39
SR-NASDAQ-2015-011 Amendment No 2 Page 55 of 64
investigations are opened where appropriate to review the behavior of all relevant
parties for all relevant trading violations
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 56 of 64
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
SR-NASDAQ-2015-011 Amendment No 2 Page 57 of 64
2 Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
SR-NASDAQ-2015-011 Amendment No 2 Page 58 of 64
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
SR-NASDAQ-2015-011 Amendment No 2 Page 59 of 64
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
SR-NASDAQ-2015-011 Amendment No 2 Page 60 of 64
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 61 of 64
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
SR-NASDAQ-2015-011 Amendment No 2 Page 62 of 64
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
B Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
C Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received From Members Participants or Others
Written comments were neither solicited nor received
III Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Within 45 days of the date of publication of this notice in the Federal Register or
within such longer period (i) as the Commission may designate up to 90 days of such date
if it finds such longer period to be appropriate and publishes its reasons for so finding or
(ii) as to which the Exchange consents the Commission shall (a) by order approve or
disapprove such proposed rule change or (b) institute proceedings to determine whether
the proposed rule change should be disapproved
SR-NASDAQ-2015-011 Amendment No 2 Page 63 of 64
IV Solicitation of Comments
Interested persons are invited to submit written data views and arguments
concerning the foregoing including whether the proposed rule change is consistent with
the Act Comments may be submitted by any of the following methods
Electronic comments
bull Use the Commissionrsquos Internet comment form
(httpwwwsecgovrulessroshtml) or
bull Send an e-mail to rule-commentssecgov Please include File Number
SR-NASDAQ-2015-011 on the subject line
Paper comments
bull Send paper comments in triplicate to Brent J Fields Secretary Securities and
Exchange Commission Station Place 100 F Street NE Washington DC
20549-9303
All submissions should refer to File Number SR-NASDAQ-2015-011 This file number
should be included on the subject line if e-mail is used To help the Commission process
and review your comments more efficiently please use only one method The
Commission will post all comments on the Commissionrsquos Internet website
httpwwwsecgovrulessroshtml
Copies of the submission all subsequent amendments all written statements with
respect to the proposed rule change that are filed with the Commission and all written
communications relating to the proposed rule change between the Commission and any
person other than those that may be withheld from the public in accordance with the
provisions of 5 USC 552 will be available for website viewing and printing in the
Commissionrsquos Public Reference Room 100 F Street NE Washington DC 20549 on
SR-NASDAQ-2015-011 Amendment No 2 Page 64 of 64
official business days between the hours of 1000 am and 300 pm Copies of the filing
also will be available for inspection and copying at the principal office of Nasdaq All
comments received will be posted without change the Commission does not edit
personal identifying information from submissions You should submit only information
that you wish to make available publicly
All submissions should refer to File Number SR-NASDAQ-2015-011 and should
be submitted on or before [insert date 21 days from publication in the Federal Register]
For the Commission by the Division of Trading and Markets pursuant to
delegated authority41
Kevin M OrsquoNeill Deputy Secretary
17 CFR 20030-3(a)(12) 41
SR-NASDAQ-2015-011 Amendment No 2 Page 13 of 64
instruments that lack readily available markets as determined in accordance with
Commission staff guidance31
The Fund will not invest in non-US equity securities
Creation and Redemption of Shares
The Fund will issue and redeem Shares on a continuous basis at net asset value
(ldquoNAVrdquo)32 only in large blocks of Shares (ldquoCreation Unitsrdquo) in transactions with
authorized participants generally including broker-dealers and large institutional
investors (ldquoAuthorized Participantsrdquo) Creation Units generally will consist of 50000
Shares although this may change from time to time Creation Units however are not
expected to consist of less than 50000 Shares As described in the Registration
Statement and consistent with the Exemptive Relief the Fund will issue and redeem
Creation Units in exchange for an in-kind portfolio of instruments andor cash in lieu of
31 The Commission has stated that long-standing Commission guidelines have required open-end funds to hold no more than 15 of their net assets in illiquid securities and other illiquid assets See Investment Company Act Release No 28193 (March 11 2008) 73 FR 14618 (March 18 2008) footnote 34 See also Investment Company Act Release No 5847 (October 21 1969) 35 FR 19989 (December 31 1970) (Statement Regarding ldquoRestricted Securitiesrdquo) Investment Company Act Release No 18612 (March 12 1992) 57 FR 9828 (March 20 1992) (Revisions of Guidelines to Form N-1A) A fundrsquos portfolio security is illiquid if it cannot be disposed of in the ordinary course of business within seven days at approximately the value ascribed to it by the fund See Investment Company Act Release No 14983 (March 12 1986) 51 FR 9773 (March 21 1986) (adopting amendments to Rule 2a-7 under the 1940 Act) Investment Company Act Release No 17452 (April 23 1990) 55 FR 17933 (April 30 1990) (adopting Rule 144A under the Securities Act of 1933)
32 The NAV of the Fundrsquos Shares generally will be calculated once daily Monday through Friday as of the close of regular trading on the New York Stock Exchange generally 400 pm Eastern Time (the ldquoNAV Calculation Timerdquo) NAV per Share will be calculated by dividing the Fundrsquos net assets by the number of Fund Shares outstanding For more information regarding the valuation of Fund investments in calculating the Fundrsquos NAV see the Registration Statement
SR-NASDAQ-2015-011 Amendment No 2 Page 14 of 64
such instruments (the ldquoCreation Basketrdquo) In addition if there is a difference between the
NAV attributable to a Creation Unit and the market value of the Creation Basket
exchanged for the Creation Unit the party conveying instruments with the lower value
will pay to the other an amount in cash equal to the difference (referred to as the ldquoCash
Componentrdquo)
Creations and redemptions must be made by or through an Authorized Participant
that has executed an agreement that has been agreed to by the Distributor and BNY with
respect to creations and redemptions of Creation Units All standard orders to create
Creation Units must be received by the transfer agent no later than the closing time of the
regular trading session on the New York Stock Exchange (ordinarily 400 pm Eastern
Time) (the ldquoClosing Timerdquo) in each case on the date such order is placed in order for the
creation of Creation Units to be effected based on the NAV of Shares as next determined
on such date after receipt of the order in proper form Shares may be redeemed only in
Creation Units at their NAV next determined after receipt not later than the Closing Time
of a redemption request in proper form by the Fund through the transfer agent and only
on a business day
The Fundrsquos custodian through the National Securities Clearing Corporation will
make available on each business day prior to the opening of business of the Exchange
the list of the names and quantities of the instruments comprising the Creation Basket as
well as the estimated Cash Component (if any) for that day The published Creation
Basket will apply until a new Creation Basket is announced on the following business
day prior to commencement of trading in the Shares
SR-NASDAQ-2015-011 Amendment No 2 Page 15 of 64
Net Asset Value
The Fundrsquos NAV will be determined as of the close of trading (normally
400 pm Eastern Time) on each day the New York Stock Exchange is open for
business NAV will be calculated for the Fund by taking the market price of the Fundrsquos
total assets including interest or dividends accrued but not yet collected less all
liabilities and dividing such amount by the total number of Shares outstanding The
result rounded to the nearest cent will be the NAV per Share All valuations will be
subject to review by the Board of Trustees of the Trust (ldquoTrust Boardrdquo) or its delegate
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with valuation procedures (which may be revised from time to time) adopted by the Trust
Board (the ldquoValuation Proceduresrdquo) and in accordance with the 1940 Act A market
valuation generally means a valuation (i) obtained from an exchange an independent
pricing service (ldquoPricing Servicerdquo) or a major market maker (or dealer) or (ii) based on a
price quotation or other equivalent indication of value supplied by an exchange a Pricing
Service or a major market maker (or dealer) The information summarized below is
based on the Valuation Procedures as currently in effect however as noted above the
Valuation Procedures are amended from time to time and therefore such information is
subject to change
Certain securities including Floating Rate Debt Instruments in which the Fund
may invest will not be listed on any securities exchange or board of trade Such
securities will typically be bought and sold by institutional investors in individually
negotiated private transactions that function in many respects like an over-the-counter
SR-NASDAQ-2015-011 Amendment No 2 Page 16 of 64
secondary market although typically no formal market makers will exist Certain
securities particularly debt securities will have few or no trades or trade infrequently
and information regarding a specific security may not be widely available or may be
incomplete Accordingly determinations of the fair value of debt securities may be
based on infrequent and dated information Because there is less reliable objective data
available elements of judgment may play a greater role in valuation of debt securities
than for other types of securities Typically Floating Rate Debt Instruments and other
debt securities in which the Fund may invest (other than those described below) will be
valued using information provided by a Pricing Service Debt securities having a
remaining maturity of 60 days or less when purchased will be valued at cost adjusted for
amortization of premiums and accretion of discounts provided the Adviserrsquos pricing
committee (the ldquoPricing Committeerdquo) has determined that the use of amortized cost is an
appropriate reflection of fair value given market and issuer-specific conditions existing at
the time of the determination Overnight repurchase agreements will be valued at cost
and term repurchase agreements (ie those whose maturity exceeds seven days) will be
valued at the average of the bid quotations obtained daily from at least two recognized
dealers
Asset-backed and mortgage-backed securities will generally be valued by using a
Pricing Service If a Pricing Service does not cover a particular asset-backed or
mortgage-backed security or discontinues covering a particular asset-backed or
mortgage-backed security the security will be priced using broker quotes generally
provided by brokers that make or participate in markets in the security To derive values
Pricing Services and broker-dealers may use matrix pricing and valuation models as well
SR-NASDAQ-2015-011 Amendment No 2 Page 17 of 64
as recent market transactions for the same or similar assets As it deems appropriate the
Pricing Committee may determine that a Pricing Service price does not represent an
accurate value of an asset-backed or mortgage-backed security based on broker quotes it
receives a recent trade in the security by the Fund information from a portfolio manager
or other market information In the event that the Pricing Committee determines that the
Pricing Service price is unreliable or inaccurate based on such other information broker
quotes may be used Additionally if the Pricing Committee determines that the price of
an asset-backed or mortgage-backed security obtained from a Pricing Service and
available broker quotes is unreliable or inaccurate due to market conditions or other
reasons or if a Pricing Service price or broker quote is unavailable the security will be
valued using fair value pricing as described below
Equity securities listed on any exchange other than the Exchange will be valued at
the last sale price on the exchange on which they are principally traded on the business
day as of which such value is being determined Equity securities listed on the Exchange
will be valued at the official closing price on the business day as of which such value is
being determined If there has been no sale on such day or no official closing price in
the case of securities traded on the Exchange the securities will be valued using fair
value pricing as described below Equity securities traded on more than one securities
exchange will be valued at the last sale price or official closing price as applicable on
the business day as of which such value is being determined at the close of the exchange
representing the principal market for such securities
Exchange-traded options and futures contracts will be valued at the closing price
in the market where such contracts are principally traded
SR-NASDAQ-2015-011 Amendment No 2 Page 18 of 64
Certain securities including Floating Rate Debt Instruments in which the Fund
will invest will not be able to be priced by pre-established pricing methods Such
securities may be valued by the Trust Board or its delegate at fair value The use of fair
value pricing by the Fund will be governed by the Valuation Procedures and conducted in
accordance with the provisions of the 1940 Act Valuing the Fundrsquos securities using fair
value pricing will result in using prices for those securities that may differ from current
market valuations or official closing prices on the applicable exchange
Availability of Information
The Fundrsquos website (wwwftportfolioscom) which will be publicly available
prior to the public offering of Shares will include a form of the prospectus for the Fund
that may be downloaded The website will include the Sharesrsquo ticker CUSIP and
exchange information along with additional quantitative information updated on a daily
basis including for the Fund (1) daily trading volume the prior business dayrsquos reported
NAV and closing price mid-point of the bidask spread at the time of calculation of such
NAV (the ldquoBidAsk Pricerdquo)33 and a calculation of the premium and discount of the
BidAsk Price against the NAV and (2) data in chart format displaying the frequency
distribution of discounts and premiums of the daily BidAsk Price against the NAV
within appropriate ranges for each of the four previous calendar quarters On each
business day before commencement of trading in Shares in the Regular Market Session34
33 The BidAsk Price of the Fund will be determined using the mid-point of the highest bid and the lowest offer on the Exchange as of the time of calculation of the Fundrsquos NAV The records relating to BidAsk Prices will be retained by the Fund and its service providers
34 See Nasdaq Rule 4120(b)(4) (describing the three trading sessions on the Exchange (1) Pre-Market Session from 4 am to 930 am Eastern Time (2)
SR-NASDAQ-2015-011 Amendment No 2 Page 19 of 64
on the Exchange the Fund will disclose on its website the identities and quantities of the
portfolio of securities and other assets (the ldquoDisclosed Portfoliordquo as defined in Nasdaq
Rule 5735(c)(2)) held by the Fund that will form the basis for the Fundrsquos calculation of
NAV at the end of the business day 35 The Fundrsquos disclosure of derivative positions in
the Disclosed Portfolio will include information that market participants can use to value
these positions intraday On a daily basis the Fund will disclose on the Fundrsquos website
the following information regarding each portfolio holding as applicable to the type of
holding ticker symbol CUSIP number or other identifier if any a description of the
holding (including the type of holding) the identity of the security or other asset or
instrument underlying the holding if any for options the option strike price quantity
held (as measured by for example par value notional value or number of shares
contracts or units) maturity date if any coupon rate if any effective date if any market
value of the holding and percentage weighting of the holding in the Fundrsquos portfolio
The website information will be publicly available at no charge
In addition for the Fund an estimated value defined in Rule 5735(c)(3) as the
ldquoIntraday Indicative Valuerdquo that reflects an estimated intraday value of the Fundrsquos
Disclosed Portfolio will be disseminated Moreover the Intraday Indicative Value
Regular Market Session from 930 am to 4 pm or 415 pm Eastern Time and (3) Post-Market Session from 4 pm or 415 pm to 8 pm Eastern Time)
Under accounting procedures to be followed by the Fund trades made on the prior business day (ldquoTrdquo) will be booked and reflected in NAV on the current business day (ldquoT+1rdquo) Accordingly the Fund will be able to disclose at the beginning of the business day the portfolio that will form the basis for the NAV calculation at the end of the business day
35
SR-NASDAQ-2015-011 Amendment No 2 Page 20 of 64
available on the NASDAQ OMX Information LLC proprietary index data service36 will
be based upon the current value for the components of the Disclosed Portfolio and will be
updated and widely disseminated by one or more major market data vendors and broadly
displayed at least every 15 seconds during the Regular Market Session The Intraday
Indicative Value will be based on quotes and closing prices from the securitiesrsquo local
market and may not reflect events that occur subsequent to the local marketrsquos close
Premiums and discounts between the Intraday Indicative Value and the market price may
occur This should not be viewed as a ldquoreal timerdquo update of the NAV per Share of the
Fund which is calculated only once a day
The dissemination of the Intraday Indicative Value together with the Disclosed
Portfolio will allow investors to determine the value of the underlying portfolio of the
Fund on a daily basis and will provide a close estimate of that value throughout the
trading day
Investors will also be able to obtain the Fundrsquos Statement of Additional
Information (ldquoSAIrdquo) the Fundrsquos annual and semi-annual reports (together ldquoShareholder
Reportsrdquo) and its Form N-CSR and Form N-SAR filed twice a year The Fundrsquos SAI
and Shareholder Reports will be available free upon request from the Fund and those
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or
downloaded from the Commissionrsquos website at wwwsecgov Information regarding
market price and trading volume of the Shares will be continually available on a real-time
Currently the NASDAQ OMX Global Index Data Service (ldquoGIDSrdquo) is the NASDAQ OMX global index data feed service offering real-time updates daily summary messages and access to widely followed indexes and Intraday Indicative Values for ETFs GIDS provides investment professionals with the daily information needed to track or trade NASDAQ OMX indexes listed ETFs or third-party partner indexes and ETFs
36
SR-NASDAQ-2015-011 Amendment No 2 Page 21 of 64
basis throughout the day on brokersrsquo computer screens and other electronic services
Information regarding the previous dayrsquos closing price and trading volume information
for the Shares will be published daily in the financial section of newspapers Quotation
and last sale information for the Shares will be available via Nasdaq proprietary quote
and trade services as well as in accordance with the Unlisted Trading Privileges and the
Consolidated Tape Association (ldquoCTArdquo) plans for the Shares Quotation and last sale
information for the other ETFs in which the Fund will invest will be available via the
quote and trade services of their respective primary exchanges as well as in accordance
with the Unlisted Trading Privileges and the CTA plans as applicable Quotation and
last sale information for US exchange-traded options will be available via the Options
Price Reporting Authority Intraday executable price quotations on Floating Rate Debt
Instruments and other assets not traded on an exchange will be available from major
broker-dealer firms or market data vendors as well as from automated quotation systems
published or other public sources or online information services Additionally the Trade
Reporting and Compliance Engine (ldquoTRACErdquo) of the Financial Industry Regulatory
Authority (ldquoFINRArdquo) will be a source of price information for corporate bonds
privately-issued securities mortgage-backed securities and asset-backed securities to the
extent transactions in such securities are reported to TRACE37 For exchange-traded
assets intraday pricing information will be available directly from the applicable listing
exchange
Broker-dealers that are FINRA member firms have an obligation to report transactions in specified debt securities to TRACE to the extent required under applicable FINRA rules Generally such debt securities will have at issuance a maturity that exceeds one calendar year
37
SR-NASDAQ-2015-011 Amendment No 2 Page 22 of 64
Additional information regarding the Fund and the Shares including investment
strategies risks creation and redemption procedures fees Fund holdings disclosure
policies distributions and taxes will be included in the Registration Statement
Initial and Continued Listing
The Shares will be subject to Rule 5735 which sets forth the initial and continued
listing criteria applicable to Managed Fund Shares The Exchange represents that for
initial andor continued listing the Fund must be in compliance with Rule 10A-338 under
the Act A minimum of 100000 Shares will be outstanding at the commencement of
trading on the Exchange The Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the NAV and the
Disclosed Portfolio will be made available to all market participants at the same time
Trading Halts
With respect to trading halts the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading in the Shares of the Fund Nasdaq will
halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12) Trading may be
halted because of market conditions or for reasons that in the view of the Exchange
make trading in the Shares inadvisable These may include (1) the extent to which
trading is not occurring in the securities andor the other assets constituting the Disclosed
Portfolio of the Fund or (2) whether other unusual conditions or circumstances
detrimental to the maintenance of a fair and orderly market are present Trading in the
See 17 CFR 24010A-3 38
SR-NASDAQ-2015-011 Amendment No 2 Page 23 of 64
Shares also will be subject to Rule 5735(d)(2)(D) which sets forth circumstances under
which Shares of the Fund may be halted
Trading Rules
Nasdaq deems the Shares to be equity securities thus rendering trading in the
Shares subject to Nasdaqrsquos existing rules governing the trading of equity securities
Nasdaq will allow trading in the Shares from 400 am until 800 pm Eastern Time
The Exchange has appropriate rules to facilitate transactions in the Shares during all
trading sessions As provided in Nasdaq Rule 5735(b)(3) the minimum price variation
for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $001
Surveillance
The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws39 The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities laws
The surveillances referred to above generally focus on detecting securities trading
outside their normal patterns which could be indicative of manipulative or other violative
activity When such situations are detected surveillance analysis follows and
investigations are opened where appropriate to review the behavior of all relevant
parties for all relevant trading violations
FINRA surveils trading on the Exchange pursuant to a regulatory services agreement The Exchange is responsible for FINRArsquos performance under this regulatory services agreement
39
SR-NASDAQ-2015-011 Amendment No 2 Page 24 of 64
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 25 of 64
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
b Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
SR-NASDAQ-2015-011 Amendment No 2 Page 26 of 64
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
SR-NASDAQ-2015-011 Amendment No 2 Page 27 of 64
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
SR-NASDAQ-2015-011 Amendment No 2 Page 28 of 64
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
SR-NASDAQ-2015-011 Amendment No 2 Page 29 of 64
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
SR-NASDAQ-2015-011 Amendment No 2 Page 30 of 64
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
SR-NASDAQ-2015-011 Amendment No 2 Page 31 of 64
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
4 Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
5 Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received from Members Participants or Others
Written comments were neither solicited nor received
6 Extension of Time Period for Commission Action
The Exchange does not consent at this time to an extension of any time period for
Commission action
7 Basis for Summary Effectiveness Pursuant to Section 19(b)(3) or for Accelerated Effectiveness Pursuant to Section 19(b)(2)
Not applicable
8 Proposed Rule Change Based on Rules of Another Self-Regulatory Organization or of the Commission
Not applicable
9 Security-Based Swap Submissions Filed Pursuant to Section 3C of the Act
Not applicable
SR-NASDAQ-2015-011 Amendment No 2 Page 32 of 64
10 Advance Notices Filed Pursuant to Section 806(e) of the Payment Clearing and Settlement Supervision Act
Not applicable
11 Exhibits
1 Completed notice of proposed rule change for publication in the Federal
Register
SR-NASDAQ-2015-011 Amendment No 2 Page 33 of 64
EXHIBIT 1
SECURITIES AND EXCHANGE COMMISSION (Release No 34shy File No SR-NASDAQ-2015-011)
April __ 2015
Self-Regulatory Organizations The NASDAQ Stock Market LLC Notice of Filing of Proposed Rule Change Relating to the Listing and Trading of the Shares of the First Trust Strategic Floating Rate ETF of First Trust Exchange-Traded Fund IV
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (ldquoActrdquo)1 and
Rule 19b-4 thereunder2 notice is hereby given that on February 12 2015 The NASDAQ
Stock Market LLC (ldquoNasdaqrdquo or the ldquoExchangerdquo) filed with the Securities and Exchange
Commission (ldquoCommissionrdquo) the proposed rule change as described in in Items I II and
III below which Items have been prepared by Nasdaq On April 6 2015 Nasdaq filed
Amendment No 1 which replaced the text of the original filing in its entirety On April
15 2015 Nasdaq filed Amendment No 2 which replaced the text of the original filing in
its entirety The Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons
I Self-Regulatory Organizationrsquos Statement of the Terms of Substance of the Proposed Rule Change
Nasdaq proposes to list and trade the shares of the First Trust Strategic Floating
Rate ETF (the ldquoFundrdquo) of the First Trust Strategic Floating Rate ETF (the ldquoFundrdquo) of
First Trust Exchange-Traded Fund IV (the ldquoTrustrdquo) under Nasdaq Rule 5735 (ldquoManaged
1 15 USC 78s(b)(1)
2 17 CFR 24019b-4
SR-NASDAQ-2015-011 Amendment No 2 Page 34 of 64
Fund Sharesrdquo)3 The shares of the Fund are collectively referred to herein as the
ldquoSharesrdquo
The text of the proposed rule change is available at
httpnasdaqcchwallstreetcom at Nasdaqrsquos principal office and at the Commissionrsquos
Public Reference Room
II Self-Regulatory Organizationrsquos Statement of the Purpose of and Statutory Basis for the Proposed Rule Change
In its filing with the Commission Nasdaq included statements concerning the
purpose of and basis for the proposed rule change The text of these statements may be
examined at the places specified in Item IV below Nasdaq has prepared summaries set
forth in Sections A B and C below of the most significant aspects of such statements
A Self-Regulatory Organizationrsquos Statement of the Purpose of and Statutory Basis for the Proposed Rule Change
1 Purpose
The Exchange proposes to list and trade the Shares of the Fund under Nasdaq
Rule 5735 which governs the listing and trading of Managed Fund Shares4 on the
3 The Commission approved Nasdaq Rule 5735 in Securities Exchange Act Release No 57962 (June 13 2008) 73 FR 35175 (June 20 2008) (SR-NASDAQ-2008shy039) There are already multiple actively-managed funds listed on the Exchange see eg Securities Exchange Act Release Nos 69464 (April 26 2013) 78 FR 25774 (May 2 2013) (SR-NASDAQ-2013-036) (order approving listing and trading of First Trust Senior Loan Fund) 68972 (February 22 2013) 78 FR 13721 (February 28 2013) (SR-NASDAQ-2012-147) (order approving listing and trading of First Trust High Yield LongShort ETF) 66489 (February 29 2012) 77 FR 13379 (March 6 2012) (SR-NASDAQ-2012-004) (order approving listing and trading of WisdomTree Emerging Markets Corporate Bond Fund) The Exchange believes the proposed rule change raises no significant issues not previously addressed in those prior Commission orders
4 A Managed Fund Share is a security that represents an interest in an investment company registered under the Investment Company Act of 1940 (15 USC 80ashy
SR-NASDAQ-2015-011 Amendment No 2 Page 35 of 64
Exchange The Fund will be an actively-managed exchange-traded fund (ldquoETFrdquo) The
Shares will be offered by the Trust which was established as a Massachusetts business
trust on September 15 20105 The Trust is registered with the Commission as an
investment company and has filed a registration statement on Form N-1A (ldquoRegistration
Statementrdquo) with the Commission6 The Fund will be a series of the Trust The Fund
intends to qualify each year as a regulated investment company (ldquoRICrdquo) under
Subchapter M of the Internal Revenue Code of 1986 as amended
First Trust Advisors LP will be the investment adviser (ldquoAdviserrdquo) to the Fund
First Trust Portfolios LP (the ldquoDistributorrdquo) will be the principal underwriter and
distributor of the Fundrsquos Shares The Bank of New York Mellon Corporation (ldquoBNYrdquo)
will act as the administrator accounting agent custodian and transfer agent to the Fund
1) (the ldquo1940 Actrdquo) organized as an open-end investment company or similar entity that invests in a portfolio of securities selected by its investment adviser consistent with its investment objectives and policies In contrast an open-end investment company that issues Index Fund Shares listed and traded on the Exchange under Nasdaq Rule 5705 seeks to provide investment results that correspond generally to the price and yield performance of a specific foreign or domestic stock index fixed income securities index or combination thereof
5 The Commission has issued an order upon which the Trust may rely granting certain exemptive relief under the 1940 Act See Investment Company Act Release No 30029 (April 10 2012) (File No 812-13795) (the ldquoExemptive Reliefrdquo) In addition the Commission has issued no-action relief upon which the Trust may rely pertaining to the Fundrsquos ability to invest in derivatives notwithstanding certain representations in the application for the Exemptive Relief See Commission No-Action Letter (December 6 2012)
6 See Post-Effective Amendment No 104 to Registration Statement on Form N-1A for the Trust dated January 29 2015 (File Nos 333-174332 and 811-22559) The descriptions of the Fund and the Shares contained herein are based in part on information in the Registration Statement
7
SR-NASDAQ-2015-011 Amendment No 2 Page 36 of 64
Paragraph (g) of Rule 5735 provides that if the investment adviser to the
investment company issuing Managed Fund Shares is affiliated with a broker-dealer
such investment adviser shall erect a ldquofire wallrdquo between the investment adviser and the
broker-dealer with respect to access to information concerning the composition andor
changes to such investment company portfolio7 In addition paragraph (g) further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio Rule 5735(g) is similar
to Nasdaq Rule 5705(b)(5)(A)(i) however paragraph (g) in connection with the
establishment of a ldquofire wallrdquo between the investment adviser and the broker-dealer
reflects the applicable open-end fundrsquos portfolio not an underlying benchmark index as
is the case with index-based funds The Adviser is not a broker-dealer although it is
affiliated with the Distributor a broker-dealer The Adviser has implemented a fire wall
An investment adviser to an open-end fund is required to be registered under the Investment Advisers Act of 1940 (the ldquoAdvisers Actrdquo) As a result the Adviser and its related personnel are subject to the provisions of Rule 204A-1 under the Advisers Act relating to codes of ethics This Rule requires investment advisers to adopt a code of ethics that reflects the fiduciary nature of the relationship to clients as well as compliance with other applicable securities laws Accordingly procedures designed to prevent the communication and misuse of non-public information by an investment adviser must be consistent with Rule 204A-1 under the Advisers Act In addition Rule 206(4)-7 under the Advisers Act makes it unlawful for an investment adviser to provide investment advice to clients unless such investment adviser has (i) adopted and implemented written policies and procedures reasonably designed to prevent violation by the investment adviser and its supervised persons of the Advisers Act and the Commission rules adopted thereunder (ii) implemented at a minimum an annual review regarding the adequacy of the policies and procedures established pursuant to subparagraph (i) above and the effectiveness of their implementation and (iii) designated an individual (who is a supervised person) responsible for administering the policies and procedures adopted under subparagraph (i) above
8
SR-NASDAQ-2015-011 Amendment No 2 Page 37 of 64
with respect to its broker-dealer affiliate regarding access to information concerning the
composition andor changes to the portfolio In addition personnel who make decisions
on the Fundrsquos portfolio composition will be subject to procedures designed to prevent the
use and dissemination of material non-public information regarding the Fundrsquos portfolio
In the event (a) the Adviser becomes or becomes newly affiliated with a broker-dealer
or (b) any new adviser or sub-adviser is a registered broker-dealer or becomes affiliated
with another broker-dealer it will implement a fire wall with respect to its relevant
personnel andor such broker-dealer affiliate as applicable regarding access to
information concerning the composition andor changes to the portfolio and will be
subject to procedures designed to prevent the use and dissemination of material
non-public information regarding such portfolio The Fund does not currently intend to
use a sub-adviser
First Trust Strategic Floating Rate ETF
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions8 at least 80 of its
The term ldquounder normal market conditionsrdquo as used herein includes but is not limited to the absence of adverse market economic political or other conditions including extreme volatility or trading halts in the fixed income markets or the financial markets generally operational issues causing dissemination of inaccurate market information or force majeure type events such as systems failure natural or man-made disaster act of God armed conflict act of terrorism riot or labor disruption or any similar intervening circumstance For temporary defensive purposes during the initial invest-up period and during periods of high cash inflows or outflows the Fund may depart from its principal investment strategies for example it may hold a higher than normal proportion of its assets in cash During such periods the Fund may not be able to achieve its investment objective The Fund may adopt a defensive strategy when the Adviser believes securities in which the Fund normally invests have elevated risks due to political or economic factors and in other extraordinary circumstances
SR-NASDAQ-2015-011 Amendment No 2 Page 38 of 64
net assets in a portfolio of the following types of floating-rate9 debt instruments issued by
US and non-US public- and private-sector entities floating-rate corporate10 and
government bonds and notes floating-rate agency securities 11 floating-rate instruments
of non-US issuers floating-rate privately-issued securities 12 floating-rate asset-backed
securities 13 floating-rate mortgage-backed securities14 floating-rate loans 15 and
9 For the avoidance of doubt the term ldquofloating-raterdquo shall also include similar terms such as ldquovariable-raterdquo and ldquoadjustable-raterdquo
10 The Adviser expects that under normal market conditions generally for a corporate bond to be considered as an eligible investment after taking into account such an investment at least 75 of the Fundrsquos net assets that are invested in floating-rate corporate bonds and as described below fixed-rate corporate bonds (in the aggregate) will be comprised of corporate bonds that have at the time of original issuance $100 million or more par amount outstanding
11 ldquoAgency securitiesrdquo for these purposes generally includes securities issued by the following entities Government National Mortgage Association (Ginnie Mae) Federal National Mortgage Association (Fannie Mae) Federal Home Loan Banks (FHLBanks) Federal Home Loan Mortgage Corporation (Freddie Mac) Farm Credit System (FCS) Farm Credit Banks (FCBanks) Student Loan Marketing Association (Sallie Mae) Resolution Funding Corporation (REFCORP) Financing Corporation (FICO) and the Farm Credit System (FCS) Financial Assistance Corporation (FAC) Agency securities can include but are not limited to mortgage-backed securities
12 ldquoPrivately-issued securitiesrdquo for these purposes generally includes Rule 144A securities other than mortgage-backed Rule 144A securities Under normal market conditions privately-issued securities will have at the time of original issuance $100 million or more principal amount outstanding to be considered eligible investments
13 Asset-backed securities are securities that are backed by a pool of assets The Fund currently intends to invest in asset-backed securities that are consumer asset-backed securities
14 Mortgage-backed securities which are securities that directly or indirectly represent a participation in or are secured by and payable from mortgage loans on real property will consist of (1) residential mortgage-backed securities (ldquoRMBSrdquo) (2) commercial mortgage-backed securities (ldquoCMBSrdquo) (3) stripped mortgage-backed securities (ldquoSMBSrdquo) which are mortgage-backed securities
SR-NASDAQ-2015-011 Amendment No 2 Page 39 of 64
investment companies16 (including investment companies advised by the Adviser) that
invest primarily in the foregoing types of debt instruments17 (collectively ldquoFloating Rate
Debt Instrumentsrdquo)
where mortgage payments are divided between paying the loanrsquos principal and paying the loanrsquos interest (4) collateralized mortgage obligations (ldquoCMOsrdquo) and real estate mortgage investment conduits (ldquoREMICsrdquo) which are mortgage-backed securities that are divided into multiple classes with each class being entitled to a different share of the principal and interest payments received from the pool of underlying assets
15 The floating-rate loans in which the Fund will invest will represent amounts borrowed by companies or other entities from banks and other lenders and a significant portion of such floating-rate loans may be rated below investment grade or unrated Floating-rate loans held by the Fund may be senior or subordinate obligations of the borrower and may or may not be secured by collateral First lien senior secured floating-rate loans are referred to herein as ldquosenior loansrdquo Floating-rate loans that are not senior loans (ie unsecured floating-rate loans and secured floating-rate loans that are not first lien floating-rate loans) are referred to herein as ldquojunior loansrdquo The Fund will generally invest in floating-rate loans that the Adviser deems to be liquid with readily available prices notwithstanding the foregoing the Fund may invest in floating-rate loans that are deemed illiquid so long as the Fund complies with the 15 limitation on investments of its net assets in illiquid assets described below under ldquoInvestment Restrictionsrdquo
16 The Fund currently anticipates investing only in registered open-end investment companies that are listed and traded in the US on registered exchanges (ie other ETFs) An ETF is an investment company registered under the 1940 Act that holds a portfolio of securities Many ETFs are designed to track the performance of a securities index including industry sector country and region indexes The Fund may invest in the securities of ETFs in excess of the limits imposed under the 1940 Act pursuant to exemptive orders obtained by other ETFs and their sponsors from the Commission In addition the Fund may invest in the securities of certain investment companies in excess of the limits imposed under the 1940 Act pursuant to an exemptive order obtained by the Trust and the Adviser from the Commission See Investment Company Act Release No 30377 (February 5 2013) (File No 812-13895) The ETFs in which the Fund may invest include Index Fund Shares (as described in Nasdaq Rule 5705) Portfolio Depository Receipts (as described in Nasdaq Rule 5705) and Managed Fund Shares (as described in Nasdaq Rule 5735) While the Fund may invest in inverse ETFs the Fund will not invest in leveraged or inverse leveraged (eg 2X or -3X) ETFs
SR-NASDAQ-2015-011 Amendment No 2 Page 40 of 64
At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade To be considered
ldquoinvestment graderdquo under normal market conditions rated Floating Rate Debt
Instruments will carry at the time of purchase a rating in the highest four rating
categories of at least one nationally recognized statistical ratings organization
(ldquoNRSROrdquo) (eg BBB- or higher by Standard amp Poorrsquos Ratings Services (ldquoSampPrdquo)
andor Fitch Ratings (ldquoFitchrdquo) or Baa3 or higher by Moodyrsquos Investors Service Inc
(ldquoMoodyrsquosrdquo)18 For unrated securities to be considered ldquoinvestment graderdquo under normal
market conditions such securities will be determined at the time of purchase to be of
comparable quality19 by the Adviser The Fund may invest up to 35 of its net assets in
securities that are at the time of investment rated below investment grade by each
NRSRO rating such securities (or securities that are unrated and determined by the
17 The liquidity of a security especially in the case of asset-backed and mortgage-backed securities will be a substantial factor in the Fundrsquos security selection process Consistent with the discussion below under ldquoInvestment Restrictionsrdquo the Fund will not purchase any Floating Rate Debt Instruments (including asset-backed securities and mortgage-backed securities) that in the Adviserrsquos opinion are illiquid if as a result more than 15 of the value of the Fundrsquos net assets will be invested in illiquid assets
18 For the avoidance of doubt if a security is rated by multiple NRSROs and receives different ratings the Fund will treat the security as being rated in the highest rating category received from an NRSRO
19 Comparable quality of unrated securities will be determined by the Adviser based on fundamental credit analysis of the unrated security and comparable NRSRO-rated securities On a best efforts basis the Adviser will attempt to make a rating determination based on publicly available data In making a ldquocomparable qualityrdquo determination the Adviser may consider for example whether the issuer of the security has issued other rated securities the nature and provisions of the relevant security whether the obligations under the relevant security are guaranteed by another entity and the rating of such guarantor (if any) relevant cash flows macroeconomic analysis andor sector or industry analysis
SR-NASDAQ-2015-011 Amendment No 2 Page 41 of 64
Adviser to be of comparable quality) commonly referred to as ldquohigh yieldrdquo or ldquojunkrdquo
bonds If subsequent to purchase by the Fund a security held by the Fund experiences a
decline in credit quality and falls below investment grade the Fund may continue to hold
the security and it will not cause the Fund to violate the 35 investment limitation
however the security will be taken into account for purposes of determining whether
purchases of additional securities will cause the Fund to violate such limitation
The Fund will limit its investments in asset-backed securities (excluding agency
mortgage-backed securities) and non-agency mortgage-backed securities (in the
aggregate) to 20 of its net assets20 In addition the Fund will limit its investments in
junior loans to 20 of its net assets
The Fund will hold debt securities (including in the aggregate Floating Rate
Debt Instruments and the fixed-rate debt securities described below) of at least 13
non-affiliated issuers
Other Investments
Under normal market conditions the Fund will invest primarily in the Floating
Rate Debt Instruments described above to meet its investment objective In addition the
Fund may invest up to 20 of its net assets in the following types of fixed-rate debt
securities corporate21 and government bonds and notes agency securities22 instruments
20 For the avoidance of doubt there is no limitation on the Fundrsquos investments in agency mortgage-backed securities
21 See footnote 10 above
22 See footnote 11 above
SR-NASDAQ-2015-011 Amendment No 2 Page 42 of 64
of non-US issuers in developed markets privately-issued securities 23 asset-backed
securities 24 mortgage-backed securities 25 municipal bonds money market securities26
and investment companies27 (including investment companies advised by the Adviser)
that invest primarily in the foregoing types of debt securities
Further to pursue its investment objective the Fund may invest up to 20 of the
value of its net assets in exchange-listed options on US Treasury futures contracts and
exchange-listed US Treasury futures contracts28 The use of these derivative
transactions may allow the Fund to obtain net long or short exposures to selected interest
rates These derivatives may also be used to hedge risks including interest rate risks and
credit risks associated with the Fundrsquos portfolio investments The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
23 See footnote 12 above
24 See footnote 13 above
25 See footnote 14 above
26 ldquoMoney market securitiesrdquo for these purposes generally includes short-term high-quality obligations issued or guaranteed by the US Treasury or the agencies or instrumentalities of the US government short-term high-quality securities issued or guaranteed by non-US governments agencies and instrumentalities repurchase agreements commercial paper (both asset-backed and non-assetshybacked) and deposits and other obligations of US and non-US banks and financial institutions
27 See footnote 16 above
28 At least 90 of the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be invested in instruments that trade in markets that are members of the Intermarket Surveillance Group (ldquoISGrdquo) (see footnote 40 below) or are parties to a comprehensive surveillance sharing agreement with the Exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 43 of 64
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index
Investment Restrictions
The Fund will not invest 25 or more of the value of its total assets in securities
of issuers in any one industry This restriction does not apply to (a) obligations issued or
guaranteed by the US government its agencies or instrumentalities or (b) securities of
other investment companies29
The Fund may hold up to an aggregate amount of 15 of its net assets in illiquid
assets (calculated at the time of investment) including Rule 144A securities deemed
illiquid by the Adviser30 The Fund will monitor its portfolio liquidity on an ongoing
basis to determine whether in light of current circumstances an adequate level of
liquidity is being maintained and will consider taking appropriate steps in order to
maintain adequate liquidity if through a change in values net assets or other
circumstances more than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid
assets include securities subject to contractual or other restrictions on resale and other
29 See Form N-1A Item 9 The Commission has taken the position that a fund is concentrated if it invests more than 25 of the value of its total assets in any one industry See eg Investment Company Act Release No 9011 (October 30 1975) 40 FR 54241 (November 21 1975)
30 In reaching liquidity decisions the Adviser may consider the following factors the frequency of trades and quotes for the security the number of dealers wishing to purchase or sell the security and the number of other potential purchasers dealer undertakings to make a market in the security and the nature of the security and the nature of the marketplace in which it trades (eg the time needed to dispose of the security the method of soliciting offers and the mechanics of transfer)
SR-NASDAQ-2015-011 Amendment No 2 Page 44 of 64
instruments that lack readily available markets as determined in accordance with
Commission staff guidance31
The Fund will not invest in non-US equity securities
Creation and Redemption of Shares
The Fund will issue and redeem Shares on a continuous basis at net asset value
(ldquoNAVrdquo)32 only in large blocks of Shares (ldquoCreation Unitsrdquo) in transactions with
authorized participants generally including broker-dealers and large institutional
investors (ldquoAuthorized Participantsrdquo) Creation Units generally will consist of 50000
Shares although this may change from time to time Creation Units however are not
expected to consist of less than 50000 Shares As described in the Registration
Statement and consistent with the Exemptive Relief the Fund will issue and redeem
Creation Units in exchange for an in-kind portfolio of instruments andor cash in lieu of
31 The Commission has stated that long-standing Commission guidelines have required open-end funds to hold no more than 15 of their net assets in illiquid securities and other illiquid assets See Investment Company Act Release No 28193 (March 11 2008) 73 FR 14618 (March 18 2008) footnote 34 See also Investment Company Act Release No 5847 (October 21 1969) 35 FR 19989 (December 31 1970) (Statement Regarding ldquoRestricted Securitiesrdquo) Investment Company Act Release No 18612 (March 12 1992) 57 FR 9828 (March 20 1992) (Revisions of Guidelines to Form N-1A) A fundrsquos portfolio security is illiquid if it cannot be disposed of in the ordinary course of business within seven days at approximately the value ascribed to it by the fund See Investment Company Act Release No 14983 (March 12 1986) 51 FR 9773 (March 21 1986) (adopting amendments to Rule 2a-7 under the 1940 Act) Investment Company Act Release No 17452 (April 23 1990) 55 FR 17933 (April 30 1990) (adopting Rule 144A under the Securities Act of 1933)
32 The NAV of the Fundrsquos Shares generally will be calculated once daily Monday through Friday as of the close of regular trading on the New York Stock Exchange generally 400 pm Eastern Time (the ldquoNAV Calculation Timerdquo) NAV per Share will be calculated by dividing the Fundrsquos net assets by the number of Fund Shares outstanding For more information regarding the valuation of Fund investments in calculating the Fundrsquos NAV see the Registration Statement
SR-NASDAQ-2015-011 Amendment No 2 Page 45 of 64
such instruments (the ldquoCreation Basketrdquo) In addition if there is a difference between the
NAV attributable to a Creation Unit and the market value of the Creation Basket
exchanged for the Creation Unit the party conveying instruments with the lower value
will pay to the other an amount in cash equal to the difference (referred to as the ldquoCash
Componentrdquo)
Creations and redemptions must be made by or through an Authorized Participant
that has executed an agreement that has been agreed to by the Distributor and BNY with
respect to creations and redemptions of Creation Units All standard orders to create
Creation Units must be received by the transfer agent no later than the closing time of the
regular trading session on the New York Stock Exchange (ordinarily 400 pm Eastern
Time) (the ldquoClosing Timerdquo) in each case on the date such order is placed in order for the
creation of Creation Units to be effected based on the NAV of Shares as next determined
on such date after receipt of the order in proper form Shares may be redeemed only in
Creation Units at their NAV next determined after receipt not later than the Closing Time
of a redemption request in proper form by the Fund through the transfer agent and only
on a business day
The Fundrsquos custodian through the National Securities Clearing Corporation will
make available on each business day prior to the opening of business of the Exchange
the list of the names and quantities of the instruments comprising the Creation Basket as
well as the estimated Cash Component (if any) for that day The published Creation
Basket will apply until a new Creation Basket is announced on the following business
day prior to commencement of trading in the Shares
SR-NASDAQ-2015-011 Amendment No 2 Page 46 of 64
Net Asset Value
The Fundrsquos NAV will be determined as of the close of trading (normally
400 pm Eastern Time) on each day the New York Stock Exchange is open for
business NAV will be calculated for the Fund by taking the market price of the Fundrsquos
total assets including interest or dividends accrued but not yet collected less all
liabilities and dividing such amount by the total number of Shares outstanding The
result rounded to the nearest cent will be the NAV per Share All valuations will be
subject to review by the Board of Trustees of the Trust (ldquoTrust Boardrdquo) or its delegate
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with valuation procedures (which may be revised from time to time) adopted by the Trust
Board (the ldquoValuation Proceduresrdquo) and in accordance with the 1940 Act A market
valuation generally means a valuation (i) obtained from an exchange an independent
pricing service (ldquoPricing Servicerdquo) or a major market maker (or dealer) or (ii) based on a
price quotation or other equivalent indication of value supplied by an exchange a Pricing
Service or a major market maker (or dealer) The information summarized below is
based on the Valuation Procedures as currently in effect however as noted above the
Valuation Procedures are amended from time to time and therefore such information is
subject to change
Certain securities including Floating Rate Debt Instruments in which the Fund
may invest will not be listed on any securities exchange or board of trade Such
securities will typically be bought and sold by institutional investors in individually
negotiated private transactions that function in many respects like an over-the-counter
SR-NASDAQ-2015-011 Amendment No 2 Page 47 of 64
secondary market although typically no formal market makers will exist Certain
securities particularly debt securities will have few or no trades or trade infrequently
and information regarding a specific security may not be widely available or may be
incomplete Accordingly determinations of the fair value of debt securities may be
based on infrequent and dated information Because there is less reliable objective data
available elements of judgment may play a greater role in valuation of debt securities
than for other types of securities Typically Floating Rate Debt Instruments and other
debt securities in which the Fund may invest (other than those described below) will be
valued using information provided by a Pricing Service Debt securities having a
remaining maturity of 60 days or less when purchased will be valued at cost adjusted for
amortization of premiums and accretion of discounts provided the Adviserrsquos pricing
committee (the ldquoPricing Committeerdquo) has determined that the use of amortized cost is an
appropriate reflection of fair value given market and issuer-specific conditions existing at
the time of the determination Overnight repurchase agreements will be valued at cost
and term repurchase agreements (ie those whose maturity exceeds seven days) will be
valued at the average of the bid quotations obtained daily from at least two recognized
dealers
Asset-backed and mortgage-backed securities will generally be valued by using a
Pricing Service If a Pricing Service does not cover a particular asset-backed or
mortgage-backed security or discontinues covering a particular asset-backed or
mortgage-backed security the security will be priced using broker quotes generally
provided by brokers that make or participate in markets in the security To derive values
Pricing Services and broker-dealers may use matrix pricing and valuation models as well
SR-NASDAQ-2015-011 Amendment No 2 Page 48 of 64
as recent market transactions for the same or similar assets As it deems appropriate the
Pricing Committee may determine that a Pricing Service price does not represent an
accurate value of an asset-backed or mortgage-backed security based on broker quotes it
receives a recent trade in the security by the Fund information from a portfolio manager
or other market information In the event that the Pricing Committee determines that the
Pricing Service price is unreliable or inaccurate based on such other information broker
quotes may be used Additionally if the Pricing Committee determines that the price of
an asset-backed or mortgage-backed security obtained from a Pricing Service and
available broker quotes is unreliable or inaccurate due to market conditions or other
reasons or if a Pricing Service price or broker quote is unavailable the security will be
valued using fair value pricing as described below
Equity securities listed on any exchange other than the Exchange will be valued at
the last sale price on the exchange on which they are principally traded on the business
day as of which such value is being determined Equity securities listed on the Exchange
will be valued at the official closing price on the business day as of which such value is
being determined If there has been no sale on such day or no official closing price in
the case of securities traded on the Exchange the securities will be valued using fair
value pricing as described below Equity securities traded on more than one securities
exchange will be valued at the last sale price or official closing price as applicable on
the business day as of which such value is being determined at the close of the exchange
representing the principal market for such securities
Exchange-traded options and futures contracts will be valued at the closing price
in the market where such contracts are principally traded
SR-NASDAQ-2015-011 Amendment No 2 Page 49 of 64
Certain securities including Floating Rate Debt Instruments in which the Fund
will invest will not be able to be priced by pre-established pricing methods Such
securities may be valued by the Trust Board or its delegate at fair value The use of fair
value pricing by the Fund will be governed by the Valuation Procedures and conducted in
accordance with the provisions of the 1940 Act Valuing the Fundrsquos securities using fair
value pricing will result in using prices for those securities that may differ from current
market valuations or official closing prices on the applicable exchange
Availability of Information
The Fundrsquos website (wwwftportfolioscom) which will be publicly available
prior to the public offering of Shares will include a form of the prospectus for the Fund
that may be downloaded The website will include the Sharesrsquo ticker CUSIP and
exchange information along with additional quantitative information updated on a daily
basis including for the Fund (1) daily trading volume the prior business dayrsquos reported
NAV and closing price mid-point of the bidask spread at the time of calculation of such
NAV (the ldquoBidAsk Pricerdquo)33 and a calculation of the premium and discount of the
BidAsk Price against the NAV and (2) data in chart format displaying the frequency
distribution of discounts and premiums of the daily BidAsk Price against the NAV
within appropriate ranges for each of the four previous calendar quarters On each
business day before commencement of trading in Shares in the Regular Market Session34
33 The BidAsk Price of the Fund will be determined using the mid-point of the highest bid and the lowest offer on the Exchange as of the time of calculation of the Fundrsquos NAV The records relating to BidAsk Prices will be retained by the Fund and its service providers
34 See Nasdaq Rule 4120(b)(4) (describing the three trading sessions on the Exchange (1) Pre-Market Session from 4 am to 930 am Eastern Time (2)
SR-NASDAQ-2015-011 Amendment No 2 Page 50 of 64
on the Exchange the Fund will disclose on its website the identities and quantities of the
portfolio of securities and other assets (the ldquoDisclosed Portfoliordquo as defined in Nasdaq
Rule 5735(c)(2)) held by the Fund that will form the basis for the Fundrsquos calculation of
NAV at the end of the business day 35 The Fundrsquos disclosure of derivative positions in
the Disclosed Portfolio will include information that market participants can use to value
these positions intraday On a daily basis the Fund will disclose on the Fundrsquos website
the following information regarding each portfolio holding as applicable to the type of
holding ticker symbol CUSIP number or other identifier if any a description of the
holding (including the type of holding) the identity of the security or other asset or
instrument underlying the holding if any for options the option strike price quantity
held (as measured by for example par value notional value or number of shares
contracts or units) maturity date if any coupon rate if any effective date if any market
value of the holding and percentage weighting of the holding in the Fundrsquos portfolio
The website information will be publicly available at no charge
In addition for the Fund an estimated value defined in Rule 5735(c)(3) as the
ldquoIntraday Indicative Valuerdquo that reflects an estimated intraday value of the Fundrsquos
Disclosed Portfolio will be disseminated Moreover the Intraday Indicative Value
Regular Market Session from 930 am to 4 pm or 415 pm Eastern Time and (3) Post-Market Session from 4 pm or 415 pm to 8 pm Eastern Time)
Under accounting procedures to be followed by the Fund trades made on the prior business day (ldquoTrdquo) will be booked and reflected in NAV on the current business day (ldquoT+1rdquo) Accordingly the Fund will be able to disclose at the beginning of the business day the portfolio that will form the basis for the NAV calculation at the end of the business day
35
SR-NASDAQ-2015-011 Amendment No 2 Page 51 of 64
available on the NASDAQ OMX Information LLC proprietary index data service36 will
be based upon the current value for the components of the Disclosed Portfolio and will be
updated and widely disseminated by one or more major market data vendors and broadly
displayed at least every 15 seconds during the Regular Market Session The Intraday
Indicative Value will be based on quotes and closing prices from the securitiesrsquo local
market and may not reflect events that occur subsequent to the local marketrsquos close
Premiums and discounts between the Intraday Indicative Value and the market price may
occur This should not be viewed as a ldquoreal timerdquo update of the NAV per Share of the
Fund which is calculated only once a day
The dissemination of the Intraday Indicative Value together with the Disclosed
Portfolio will allow investors to determine the value of the underlying portfolio of the
Fund on a daily basis and will provide a close estimate of that value throughout the
trading day
Investors will also be able to obtain the Fundrsquos Statement of Additional
Information (ldquoSAIrdquo) the Fundrsquos annual and semi-annual reports (together ldquoShareholder
Reportsrdquo) and its Form N-CSR and Form N-SAR filed twice a year The Fundrsquos SAI
and Shareholder Reports will be available free upon request from the Fund and those
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or
downloaded from the Commissionrsquos website at wwwsecgov Information regarding
Currently the NASDAQ OMX Global Index Data Service (ldquoGIDSrdquo) is the NASDAQ OMX global index data feed service offering real-time updates daily summary messages and access to widely followed indexes and Intraday Indicative Values for ETFs GIDS provides investment professionals with the daily information needed to track or trade NASDAQ OMX indexes listed ETFs or third-party partner indexes and ETFs
36
SR-NASDAQ-2015-011 Amendment No 2 Page 52 of 64
market price and trading volume of the Shares will be continually available on a real-time
basis throughout the day on brokersrsquo computer screens and other electronic services
Information regarding the previous dayrsquos closing price and trading volume information
for the Shares will be published daily in the financial section of newspapers Quotation
and last sale information for the Shares will be available via Nasdaq proprietary quote
and trade services as well as in accordance with the Unlisted Trading Privileges and the
Consolidated Tape Association (ldquoCTArdquo) plans for the Shares Quotation and last sale
information for the other ETFs in which the Fund will invest will be available via the
quote and trade services of their respective primary exchanges as well as in accordance
with the Unlisted Trading Privileges and the CTA plans as applicable Quotation and
last sale information for US exchange-traded options will be available via the Options
Price Reporting Authority Intraday executable price quotations on Floating Rate Debt
Instruments and other assets not traded on an exchange will be available from major
broker-dealer firms or market data vendors as well as from automated quotation systems
published or other public sources or online information services Additionally the Trade
Reporting and Compliance Engine (ldquoTRACErdquo) of the Financial Industry Regulatory
Authority (ldquoFINRArdquo) will be a source of price information for corporate bonds
privately-issued securities mortgage-backed securities and asset-backed securities to the
extent transactions in such securities are reported to TRACE37 For exchange-traded
Broker-dealers that are FINRA member firms have an obligation to report transactions in specified debt securities to TRACE to the extent required under applicable FINRA rules Generally such debt securities will have at issuance a maturity that exceeds one calendar year
37
SR-NASDAQ-2015-011 Amendment No 2 Page 53 of 64
assets intraday pricing information will be available directly from the applicable listing
exchange
Additional information regarding the Fund and the Shares including investment
strategies risks creation and redemption procedures fees Fund holdings disclosure
policies distributions and taxes will be included in the Registration Statement
Initial and Continued Listing
The Shares will be subject to Rule 5735 which sets forth the initial and continued
listing criteria applicable to Managed Fund Shares The Exchange represents that for
initial andor continued listing the Fund must be in compliance with Rule 10A-338 under
the Act A minimum of 100000 Shares will be outstanding at the commencement of
trading on the Exchange The Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the NAV and the
Disclosed Portfolio will be made available to all market participants at the same time
Trading Halts
With respect to trading halts the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading in the Shares of the Fund Nasdaq will
halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12) Trading may be
halted because of market conditions or for reasons that in the view of the Exchange
make trading in the Shares inadvisable These may include (1) the extent to which
trading is not occurring in the securities andor the other assets constituting the Disclosed
Portfolio of the Fund or (2) whether other unusual conditions or circumstances
See 17 CFR 24010A-3 38
SR-NASDAQ-2015-011 Amendment No 2 Page 54 of 64
detrimental to the maintenance of a fair and orderly market are present Trading in the
Shares also will be subject to Rule 5735(d)(2)(D) which sets forth circumstances under
which Shares of the Fund may be halted
Trading Rules
Nasdaq deems the Shares to be equity securities thus rendering trading in the
Shares subject to Nasdaqrsquos existing rules governing the trading of equity securities
Nasdaq will allow trading in the Shares from 400 am until 800 pm Eastern Time
The Exchange has appropriate rules to facilitate transactions in the Shares during all
trading sessions As provided in Nasdaq Rule 5735(b)(3) the minimum price variation
for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $001
Surveillance
The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws39 The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities laws
The surveillances referred to above generally focus on detecting securities trading
outside their normal patterns which could be indicative of manipulative or other violative
activity When such situations are detected surveillance analysis follows and
FINRA surveils trading on the Exchange pursuant to a regulatory services agreement The Exchange is responsible for FINRArsquos performance under this regulatory services agreement
39
SR-NASDAQ-2015-011 Amendment No 2 Page 55 of 64
investigations are opened where appropriate to review the behavior of all relevant
parties for all relevant trading violations
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 56 of 64
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
SR-NASDAQ-2015-011 Amendment No 2 Page 57 of 64
2 Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
SR-NASDAQ-2015-011 Amendment No 2 Page 58 of 64
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
SR-NASDAQ-2015-011 Amendment No 2 Page 59 of 64
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
SR-NASDAQ-2015-011 Amendment No 2 Page 60 of 64
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 61 of 64
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
SR-NASDAQ-2015-011 Amendment No 2 Page 62 of 64
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
B Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
C Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received From Members Participants or Others
Written comments were neither solicited nor received
III Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Within 45 days of the date of publication of this notice in the Federal Register or
within such longer period (i) as the Commission may designate up to 90 days of such date
if it finds such longer period to be appropriate and publishes its reasons for so finding or
(ii) as to which the Exchange consents the Commission shall (a) by order approve or
disapprove such proposed rule change or (b) institute proceedings to determine whether
the proposed rule change should be disapproved
SR-NASDAQ-2015-011 Amendment No 2 Page 63 of 64
IV Solicitation of Comments
Interested persons are invited to submit written data views and arguments
concerning the foregoing including whether the proposed rule change is consistent with
the Act Comments may be submitted by any of the following methods
Electronic comments
bull Use the Commissionrsquos Internet comment form
(httpwwwsecgovrulessroshtml) or
bull Send an e-mail to rule-commentssecgov Please include File Number
SR-NASDAQ-2015-011 on the subject line
Paper comments
bull Send paper comments in triplicate to Brent J Fields Secretary Securities and
Exchange Commission Station Place 100 F Street NE Washington DC
20549-9303
All submissions should refer to File Number SR-NASDAQ-2015-011 This file number
should be included on the subject line if e-mail is used To help the Commission process
and review your comments more efficiently please use only one method The
Commission will post all comments on the Commissionrsquos Internet website
httpwwwsecgovrulessroshtml
Copies of the submission all subsequent amendments all written statements with
respect to the proposed rule change that are filed with the Commission and all written
communications relating to the proposed rule change between the Commission and any
person other than those that may be withheld from the public in accordance with the
provisions of 5 USC 552 will be available for website viewing and printing in the
Commissionrsquos Public Reference Room 100 F Street NE Washington DC 20549 on
SR-NASDAQ-2015-011 Amendment No 2 Page 64 of 64
official business days between the hours of 1000 am and 300 pm Copies of the filing
also will be available for inspection and copying at the principal office of Nasdaq All
comments received will be posted without change the Commission does not edit
personal identifying information from submissions You should submit only information
that you wish to make available publicly
All submissions should refer to File Number SR-NASDAQ-2015-011 and should
be submitted on or before [insert date 21 days from publication in the Federal Register]
For the Commission by the Division of Trading and Markets pursuant to
delegated authority41
Kevin M OrsquoNeill Deputy Secretary
17 CFR 20030-3(a)(12) 41
SR-NASDAQ-2015-011 Amendment No 2 Page 14 of 64
such instruments (the ldquoCreation Basketrdquo) In addition if there is a difference between the
NAV attributable to a Creation Unit and the market value of the Creation Basket
exchanged for the Creation Unit the party conveying instruments with the lower value
will pay to the other an amount in cash equal to the difference (referred to as the ldquoCash
Componentrdquo)
Creations and redemptions must be made by or through an Authorized Participant
that has executed an agreement that has been agreed to by the Distributor and BNY with
respect to creations and redemptions of Creation Units All standard orders to create
Creation Units must be received by the transfer agent no later than the closing time of the
regular trading session on the New York Stock Exchange (ordinarily 400 pm Eastern
Time) (the ldquoClosing Timerdquo) in each case on the date such order is placed in order for the
creation of Creation Units to be effected based on the NAV of Shares as next determined
on such date after receipt of the order in proper form Shares may be redeemed only in
Creation Units at their NAV next determined after receipt not later than the Closing Time
of a redemption request in proper form by the Fund through the transfer agent and only
on a business day
The Fundrsquos custodian through the National Securities Clearing Corporation will
make available on each business day prior to the opening of business of the Exchange
the list of the names and quantities of the instruments comprising the Creation Basket as
well as the estimated Cash Component (if any) for that day The published Creation
Basket will apply until a new Creation Basket is announced on the following business
day prior to commencement of trading in the Shares
SR-NASDAQ-2015-011 Amendment No 2 Page 15 of 64
Net Asset Value
The Fundrsquos NAV will be determined as of the close of trading (normally
400 pm Eastern Time) on each day the New York Stock Exchange is open for
business NAV will be calculated for the Fund by taking the market price of the Fundrsquos
total assets including interest or dividends accrued but not yet collected less all
liabilities and dividing such amount by the total number of Shares outstanding The
result rounded to the nearest cent will be the NAV per Share All valuations will be
subject to review by the Board of Trustees of the Trust (ldquoTrust Boardrdquo) or its delegate
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with valuation procedures (which may be revised from time to time) adopted by the Trust
Board (the ldquoValuation Proceduresrdquo) and in accordance with the 1940 Act A market
valuation generally means a valuation (i) obtained from an exchange an independent
pricing service (ldquoPricing Servicerdquo) or a major market maker (or dealer) or (ii) based on a
price quotation or other equivalent indication of value supplied by an exchange a Pricing
Service or a major market maker (or dealer) The information summarized below is
based on the Valuation Procedures as currently in effect however as noted above the
Valuation Procedures are amended from time to time and therefore such information is
subject to change
Certain securities including Floating Rate Debt Instruments in which the Fund
may invest will not be listed on any securities exchange or board of trade Such
securities will typically be bought and sold by institutional investors in individually
negotiated private transactions that function in many respects like an over-the-counter
SR-NASDAQ-2015-011 Amendment No 2 Page 16 of 64
secondary market although typically no formal market makers will exist Certain
securities particularly debt securities will have few or no trades or trade infrequently
and information regarding a specific security may not be widely available or may be
incomplete Accordingly determinations of the fair value of debt securities may be
based on infrequent and dated information Because there is less reliable objective data
available elements of judgment may play a greater role in valuation of debt securities
than for other types of securities Typically Floating Rate Debt Instruments and other
debt securities in which the Fund may invest (other than those described below) will be
valued using information provided by a Pricing Service Debt securities having a
remaining maturity of 60 days or less when purchased will be valued at cost adjusted for
amortization of premiums and accretion of discounts provided the Adviserrsquos pricing
committee (the ldquoPricing Committeerdquo) has determined that the use of amortized cost is an
appropriate reflection of fair value given market and issuer-specific conditions existing at
the time of the determination Overnight repurchase agreements will be valued at cost
and term repurchase agreements (ie those whose maturity exceeds seven days) will be
valued at the average of the bid quotations obtained daily from at least two recognized
dealers
Asset-backed and mortgage-backed securities will generally be valued by using a
Pricing Service If a Pricing Service does not cover a particular asset-backed or
mortgage-backed security or discontinues covering a particular asset-backed or
mortgage-backed security the security will be priced using broker quotes generally
provided by brokers that make or participate in markets in the security To derive values
Pricing Services and broker-dealers may use matrix pricing and valuation models as well
SR-NASDAQ-2015-011 Amendment No 2 Page 17 of 64
as recent market transactions for the same or similar assets As it deems appropriate the
Pricing Committee may determine that a Pricing Service price does not represent an
accurate value of an asset-backed or mortgage-backed security based on broker quotes it
receives a recent trade in the security by the Fund information from a portfolio manager
or other market information In the event that the Pricing Committee determines that the
Pricing Service price is unreliable or inaccurate based on such other information broker
quotes may be used Additionally if the Pricing Committee determines that the price of
an asset-backed or mortgage-backed security obtained from a Pricing Service and
available broker quotes is unreliable or inaccurate due to market conditions or other
reasons or if a Pricing Service price or broker quote is unavailable the security will be
valued using fair value pricing as described below
Equity securities listed on any exchange other than the Exchange will be valued at
the last sale price on the exchange on which they are principally traded on the business
day as of which such value is being determined Equity securities listed on the Exchange
will be valued at the official closing price on the business day as of which such value is
being determined If there has been no sale on such day or no official closing price in
the case of securities traded on the Exchange the securities will be valued using fair
value pricing as described below Equity securities traded on more than one securities
exchange will be valued at the last sale price or official closing price as applicable on
the business day as of which such value is being determined at the close of the exchange
representing the principal market for such securities
Exchange-traded options and futures contracts will be valued at the closing price
in the market where such contracts are principally traded
SR-NASDAQ-2015-011 Amendment No 2 Page 18 of 64
Certain securities including Floating Rate Debt Instruments in which the Fund
will invest will not be able to be priced by pre-established pricing methods Such
securities may be valued by the Trust Board or its delegate at fair value The use of fair
value pricing by the Fund will be governed by the Valuation Procedures and conducted in
accordance with the provisions of the 1940 Act Valuing the Fundrsquos securities using fair
value pricing will result in using prices for those securities that may differ from current
market valuations or official closing prices on the applicable exchange
Availability of Information
The Fundrsquos website (wwwftportfolioscom) which will be publicly available
prior to the public offering of Shares will include a form of the prospectus for the Fund
that may be downloaded The website will include the Sharesrsquo ticker CUSIP and
exchange information along with additional quantitative information updated on a daily
basis including for the Fund (1) daily trading volume the prior business dayrsquos reported
NAV and closing price mid-point of the bidask spread at the time of calculation of such
NAV (the ldquoBidAsk Pricerdquo)33 and a calculation of the premium and discount of the
BidAsk Price against the NAV and (2) data in chart format displaying the frequency
distribution of discounts and premiums of the daily BidAsk Price against the NAV
within appropriate ranges for each of the four previous calendar quarters On each
business day before commencement of trading in Shares in the Regular Market Session34
33 The BidAsk Price of the Fund will be determined using the mid-point of the highest bid and the lowest offer on the Exchange as of the time of calculation of the Fundrsquos NAV The records relating to BidAsk Prices will be retained by the Fund and its service providers
34 See Nasdaq Rule 4120(b)(4) (describing the three trading sessions on the Exchange (1) Pre-Market Session from 4 am to 930 am Eastern Time (2)
SR-NASDAQ-2015-011 Amendment No 2 Page 19 of 64
on the Exchange the Fund will disclose on its website the identities and quantities of the
portfolio of securities and other assets (the ldquoDisclosed Portfoliordquo as defined in Nasdaq
Rule 5735(c)(2)) held by the Fund that will form the basis for the Fundrsquos calculation of
NAV at the end of the business day 35 The Fundrsquos disclosure of derivative positions in
the Disclosed Portfolio will include information that market participants can use to value
these positions intraday On a daily basis the Fund will disclose on the Fundrsquos website
the following information regarding each portfolio holding as applicable to the type of
holding ticker symbol CUSIP number or other identifier if any a description of the
holding (including the type of holding) the identity of the security or other asset or
instrument underlying the holding if any for options the option strike price quantity
held (as measured by for example par value notional value or number of shares
contracts or units) maturity date if any coupon rate if any effective date if any market
value of the holding and percentage weighting of the holding in the Fundrsquos portfolio
The website information will be publicly available at no charge
In addition for the Fund an estimated value defined in Rule 5735(c)(3) as the
ldquoIntraday Indicative Valuerdquo that reflects an estimated intraday value of the Fundrsquos
Disclosed Portfolio will be disseminated Moreover the Intraday Indicative Value
Regular Market Session from 930 am to 4 pm or 415 pm Eastern Time and (3) Post-Market Session from 4 pm or 415 pm to 8 pm Eastern Time)
Under accounting procedures to be followed by the Fund trades made on the prior business day (ldquoTrdquo) will be booked and reflected in NAV on the current business day (ldquoT+1rdquo) Accordingly the Fund will be able to disclose at the beginning of the business day the portfolio that will form the basis for the NAV calculation at the end of the business day
35
SR-NASDAQ-2015-011 Amendment No 2 Page 20 of 64
available on the NASDAQ OMX Information LLC proprietary index data service36 will
be based upon the current value for the components of the Disclosed Portfolio and will be
updated and widely disseminated by one or more major market data vendors and broadly
displayed at least every 15 seconds during the Regular Market Session The Intraday
Indicative Value will be based on quotes and closing prices from the securitiesrsquo local
market and may not reflect events that occur subsequent to the local marketrsquos close
Premiums and discounts between the Intraday Indicative Value and the market price may
occur This should not be viewed as a ldquoreal timerdquo update of the NAV per Share of the
Fund which is calculated only once a day
The dissemination of the Intraday Indicative Value together with the Disclosed
Portfolio will allow investors to determine the value of the underlying portfolio of the
Fund on a daily basis and will provide a close estimate of that value throughout the
trading day
Investors will also be able to obtain the Fundrsquos Statement of Additional
Information (ldquoSAIrdquo) the Fundrsquos annual and semi-annual reports (together ldquoShareholder
Reportsrdquo) and its Form N-CSR and Form N-SAR filed twice a year The Fundrsquos SAI
and Shareholder Reports will be available free upon request from the Fund and those
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or
downloaded from the Commissionrsquos website at wwwsecgov Information regarding
market price and trading volume of the Shares will be continually available on a real-time
Currently the NASDAQ OMX Global Index Data Service (ldquoGIDSrdquo) is the NASDAQ OMX global index data feed service offering real-time updates daily summary messages and access to widely followed indexes and Intraday Indicative Values for ETFs GIDS provides investment professionals with the daily information needed to track or trade NASDAQ OMX indexes listed ETFs or third-party partner indexes and ETFs
36
SR-NASDAQ-2015-011 Amendment No 2 Page 21 of 64
basis throughout the day on brokersrsquo computer screens and other electronic services
Information regarding the previous dayrsquos closing price and trading volume information
for the Shares will be published daily in the financial section of newspapers Quotation
and last sale information for the Shares will be available via Nasdaq proprietary quote
and trade services as well as in accordance with the Unlisted Trading Privileges and the
Consolidated Tape Association (ldquoCTArdquo) plans for the Shares Quotation and last sale
information for the other ETFs in which the Fund will invest will be available via the
quote and trade services of their respective primary exchanges as well as in accordance
with the Unlisted Trading Privileges and the CTA plans as applicable Quotation and
last sale information for US exchange-traded options will be available via the Options
Price Reporting Authority Intraday executable price quotations on Floating Rate Debt
Instruments and other assets not traded on an exchange will be available from major
broker-dealer firms or market data vendors as well as from automated quotation systems
published or other public sources or online information services Additionally the Trade
Reporting and Compliance Engine (ldquoTRACErdquo) of the Financial Industry Regulatory
Authority (ldquoFINRArdquo) will be a source of price information for corporate bonds
privately-issued securities mortgage-backed securities and asset-backed securities to the
extent transactions in such securities are reported to TRACE37 For exchange-traded
assets intraday pricing information will be available directly from the applicable listing
exchange
Broker-dealers that are FINRA member firms have an obligation to report transactions in specified debt securities to TRACE to the extent required under applicable FINRA rules Generally such debt securities will have at issuance a maturity that exceeds one calendar year
37
SR-NASDAQ-2015-011 Amendment No 2 Page 22 of 64
Additional information regarding the Fund and the Shares including investment
strategies risks creation and redemption procedures fees Fund holdings disclosure
policies distributions and taxes will be included in the Registration Statement
Initial and Continued Listing
The Shares will be subject to Rule 5735 which sets forth the initial and continued
listing criteria applicable to Managed Fund Shares The Exchange represents that for
initial andor continued listing the Fund must be in compliance with Rule 10A-338 under
the Act A minimum of 100000 Shares will be outstanding at the commencement of
trading on the Exchange The Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the NAV and the
Disclosed Portfolio will be made available to all market participants at the same time
Trading Halts
With respect to trading halts the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading in the Shares of the Fund Nasdaq will
halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12) Trading may be
halted because of market conditions or for reasons that in the view of the Exchange
make trading in the Shares inadvisable These may include (1) the extent to which
trading is not occurring in the securities andor the other assets constituting the Disclosed
Portfolio of the Fund or (2) whether other unusual conditions or circumstances
detrimental to the maintenance of a fair and orderly market are present Trading in the
See 17 CFR 24010A-3 38
SR-NASDAQ-2015-011 Amendment No 2 Page 23 of 64
Shares also will be subject to Rule 5735(d)(2)(D) which sets forth circumstances under
which Shares of the Fund may be halted
Trading Rules
Nasdaq deems the Shares to be equity securities thus rendering trading in the
Shares subject to Nasdaqrsquos existing rules governing the trading of equity securities
Nasdaq will allow trading in the Shares from 400 am until 800 pm Eastern Time
The Exchange has appropriate rules to facilitate transactions in the Shares during all
trading sessions As provided in Nasdaq Rule 5735(b)(3) the minimum price variation
for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $001
Surveillance
The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws39 The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities laws
The surveillances referred to above generally focus on detecting securities trading
outside their normal patterns which could be indicative of manipulative or other violative
activity When such situations are detected surveillance analysis follows and
investigations are opened where appropriate to review the behavior of all relevant
parties for all relevant trading violations
FINRA surveils trading on the Exchange pursuant to a regulatory services agreement The Exchange is responsible for FINRArsquos performance under this regulatory services agreement
39
SR-NASDAQ-2015-011 Amendment No 2 Page 24 of 64
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 25 of 64
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
b Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
SR-NASDAQ-2015-011 Amendment No 2 Page 26 of 64
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
SR-NASDAQ-2015-011 Amendment No 2 Page 27 of 64
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
SR-NASDAQ-2015-011 Amendment No 2 Page 28 of 64
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
SR-NASDAQ-2015-011 Amendment No 2 Page 29 of 64
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
SR-NASDAQ-2015-011 Amendment No 2 Page 30 of 64
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
SR-NASDAQ-2015-011 Amendment No 2 Page 31 of 64
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
4 Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
5 Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received from Members Participants or Others
Written comments were neither solicited nor received
6 Extension of Time Period for Commission Action
The Exchange does not consent at this time to an extension of any time period for
Commission action
7 Basis for Summary Effectiveness Pursuant to Section 19(b)(3) or for Accelerated Effectiveness Pursuant to Section 19(b)(2)
Not applicable
8 Proposed Rule Change Based on Rules of Another Self-Regulatory Organization or of the Commission
Not applicable
9 Security-Based Swap Submissions Filed Pursuant to Section 3C of the Act
Not applicable
SR-NASDAQ-2015-011 Amendment No 2 Page 32 of 64
10 Advance Notices Filed Pursuant to Section 806(e) of the Payment Clearing and Settlement Supervision Act
Not applicable
11 Exhibits
1 Completed notice of proposed rule change for publication in the Federal
Register
SR-NASDAQ-2015-011 Amendment No 2 Page 33 of 64
EXHIBIT 1
SECURITIES AND EXCHANGE COMMISSION (Release No 34shy File No SR-NASDAQ-2015-011)
April __ 2015
Self-Regulatory Organizations The NASDAQ Stock Market LLC Notice of Filing of Proposed Rule Change Relating to the Listing and Trading of the Shares of the First Trust Strategic Floating Rate ETF of First Trust Exchange-Traded Fund IV
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (ldquoActrdquo)1 and
Rule 19b-4 thereunder2 notice is hereby given that on February 12 2015 The NASDAQ
Stock Market LLC (ldquoNasdaqrdquo or the ldquoExchangerdquo) filed with the Securities and Exchange
Commission (ldquoCommissionrdquo) the proposed rule change as described in in Items I II and
III below which Items have been prepared by Nasdaq On April 6 2015 Nasdaq filed
Amendment No 1 which replaced the text of the original filing in its entirety On April
15 2015 Nasdaq filed Amendment No 2 which replaced the text of the original filing in
its entirety The Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons
I Self-Regulatory Organizationrsquos Statement of the Terms of Substance of the Proposed Rule Change
Nasdaq proposes to list and trade the shares of the First Trust Strategic Floating
Rate ETF (the ldquoFundrdquo) of the First Trust Strategic Floating Rate ETF (the ldquoFundrdquo) of
First Trust Exchange-Traded Fund IV (the ldquoTrustrdquo) under Nasdaq Rule 5735 (ldquoManaged
1 15 USC 78s(b)(1)
2 17 CFR 24019b-4
SR-NASDAQ-2015-011 Amendment No 2 Page 34 of 64
Fund Sharesrdquo)3 The shares of the Fund are collectively referred to herein as the
ldquoSharesrdquo
The text of the proposed rule change is available at
httpnasdaqcchwallstreetcom at Nasdaqrsquos principal office and at the Commissionrsquos
Public Reference Room
II Self-Regulatory Organizationrsquos Statement of the Purpose of and Statutory Basis for the Proposed Rule Change
In its filing with the Commission Nasdaq included statements concerning the
purpose of and basis for the proposed rule change The text of these statements may be
examined at the places specified in Item IV below Nasdaq has prepared summaries set
forth in Sections A B and C below of the most significant aspects of such statements
A Self-Regulatory Organizationrsquos Statement of the Purpose of and Statutory Basis for the Proposed Rule Change
1 Purpose
The Exchange proposes to list and trade the Shares of the Fund under Nasdaq
Rule 5735 which governs the listing and trading of Managed Fund Shares4 on the
3 The Commission approved Nasdaq Rule 5735 in Securities Exchange Act Release No 57962 (June 13 2008) 73 FR 35175 (June 20 2008) (SR-NASDAQ-2008shy039) There are already multiple actively-managed funds listed on the Exchange see eg Securities Exchange Act Release Nos 69464 (April 26 2013) 78 FR 25774 (May 2 2013) (SR-NASDAQ-2013-036) (order approving listing and trading of First Trust Senior Loan Fund) 68972 (February 22 2013) 78 FR 13721 (February 28 2013) (SR-NASDAQ-2012-147) (order approving listing and trading of First Trust High Yield LongShort ETF) 66489 (February 29 2012) 77 FR 13379 (March 6 2012) (SR-NASDAQ-2012-004) (order approving listing and trading of WisdomTree Emerging Markets Corporate Bond Fund) The Exchange believes the proposed rule change raises no significant issues not previously addressed in those prior Commission orders
4 A Managed Fund Share is a security that represents an interest in an investment company registered under the Investment Company Act of 1940 (15 USC 80ashy
SR-NASDAQ-2015-011 Amendment No 2 Page 35 of 64
Exchange The Fund will be an actively-managed exchange-traded fund (ldquoETFrdquo) The
Shares will be offered by the Trust which was established as a Massachusetts business
trust on September 15 20105 The Trust is registered with the Commission as an
investment company and has filed a registration statement on Form N-1A (ldquoRegistration
Statementrdquo) with the Commission6 The Fund will be a series of the Trust The Fund
intends to qualify each year as a regulated investment company (ldquoRICrdquo) under
Subchapter M of the Internal Revenue Code of 1986 as amended
First Trust Advisors LP will be the investment adviser (ldquoAdviserrdquo) to the Fund
First Trust Portfolios LP (the ldquoDistributorrdquo) will be the principal underwriter and
distributor of the Fundrsquos Shares The Bank of New York Mellon Corporation (ldquoBNYrdquo)
will act as the administrator accounting agent custodian and transfer agent to the Fund
1) (the ldquo1940 Actrdquo) organized as an open-end investment company or similar entity that invests in a portfolio of securities selected by its investment adviser consistent with its investment objectives and policies In contrast an open-end investment company that issues Index Fund Shares listed and traded on the Exchange under Nasdaq Rule 5705 seeks to provide investment results that correspond generally to the price and yield performance of a specific foreign or domestic stock index fixed income securities index or combination thereof
5 The Commission has issued an order upon which the Trust may rely granting certain exemptive relief under the 1940 Act See Investment Company Act Release No 30029 (April 10 2012) (File No 812-13795) (the ldquoExemptive Reliefrdquo) In addition the Commission has issued no-action relief upon which the Trust may rely pertaining to the Fundrsquos ability to invest in derivatives notwithstanding certain representations in the application for the Exemptive Relief See Commission No-Action Letter (December 6 2012)
6 See Post-Effective Amendment No 104 to Registration Statement on Form N-1A for the Trust dated January 29 2015 (File Nos 333-174332 and 811-22559) The descriptions of the Fund and the Shares contained herein are based in part on information in the Registration Statement
7
SR-NASDAQ-2015-011 Amendment No 2 Page 36 of 64
Paragraph (g) of Rule 5735 provides that if the investment adviser to the
investment company issuing Managed Fund Shares is affiliated with a broker-dealer
such investment adviser shall erect a ldquofire wallrdquo between the investment adviser and the
broker-dealer with respect to access to information concerning the composition andor
changes to such investment company portfolio7 In addition paragraph (g) further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio Rule 5735(g) is similar
to Nasdaq Rule 5705(b)(5)(A)(i) however paragraph (g) in connection with the
establishment of a ldquofire wallrdquo between the investment adviser and the broker-dealer
reflects the applicable open-end fundrsquos portfolio not an underlying benchmark index as
is the case with index-based funds The Adviser is not a broker-dealer although it is
affiliated with the Distributor a broker-dealer The Adviser has implemented a fire wall
An investment adviser to an open-end fund is required to be registered under the Investment Advisers Act of 1940 (the ldquoAdvisers Actrdquo) As a result the Adviser and its related personnel are subject to the provisions of Rule 204A-1 under the Advisers Act relating to codes of ethics This Rule requires investment advisers to adopt a code of ethics that reflects the fiduciary nature of the relationship to clients as well as compliance with other applicable securities laws Accordingly procedures designed to prevent the communication and misuse of non-public information by an investment adviser must be consistent with Rule 204A-1 under the Advisers Act In addition Rule 206(4)-7 under the Advisers Act makes it unlawful for an investment adviser to provide investment advice to clients unless such investment adviser has (i) adopted and implemented written policies and procedures reasonably designed to prevent violation by the investment adviser and its supervised persons of the Advisers Act and the Commission rules adopted thereunder (ii) implemented at a minimum an annual review regarding the adequacy of the policies and procedures established pursuant to subparagraph (i) above and the effectiveness of their implementation and (iii) designated an individual (who is a supervised person) responsible for administering the policies and procedures adopted under subparagraph (i) above
8
SR-NASDAQ-2015-011 Amendment No 2 Page 37 of 64
with respect to its broker-dealer affiliate regarding access to information concerning the
composition andor changes to the portfolio In addition personnel who make decisions
on the Fundrsquos portfolio composition will be subject to procedures designed to prevent the
use and dissemination of material non-public information regarding the Fundrsquos portfolio
In the event (a) the Adviser becomes or becomes newly affiliated with a broker-dealer
or (b) any new adviser or sub-adviser is a registered broker-dealer or becomes affiliated
with another broker-dealer it will implement a fire wall with respect to its relevant
personnel andor such broker-dealer affiliate as applicable regarding access to
information concerning the composition andor changes to the portfolio and will be
subject to procedures designed to prevent the use and dissemination of material
non-public information regarding such portfolio The Fund does not currently intend to
use a sub-adviser
First Trust Strategic Floating Rate ETF
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions8 at least 80 of its
The term ldquounder normal market conditionsrdquo as used herein includes but is not limited to the absence of adverse market economic political or other conditions including extreme volatility or trading halts in the fixed income markets or the financial markets generally operational issues causing dissemination of inaccurate market information or force majeure type events such as systems failure natural or man-made disaster act of God armed conflict act of terrorism riot or labor disruption or any similar intervening circumstance For temporary defensive purposes during the initial invest-up period and during periods of high cash inflows or outflows the Fund may depart from its principal investment strategies for example it may hold a higher than normal proportion of its assets in cash During such periods the Fund may not be able to achieve its investment objective The Fund may adopt a defensive strategy when the Adviser believes securities in which the Fund normally invests have elevated risks due to political or economic factors and in other extraordinary circumstances
SR-NASDAQ-2015-011 Amendment No 2 Page 38 of 64
net assets in a portfolio of the following types of floating-rate9 debt instruments issued by
US and non-US public- and private-sector entities floating-rate corporate10 and
government bonds and notes floating-rate agency securities 11 floating-rate instruments
of non-US issuers floating-rate privately-issued securities 12 floating-rate asset-backed
securities 13 floating-rate mortgage-backed securities14 floating-rate loans 15 and
9 For the avoidance of doubt the term ldquofloating-raterdquo shall also include similar terms such as ldquovariable-raterdquo and ldquoadjustable-raterdquo
10 The Adviser expects that under normal market conditions generally for a corporate bond to be considered as an eligible investment after taking into account such an investment at least 75 of the Fundrsquos net assets that are invested in floating-rate corporate bonds and as described below fixed-rate corporate bonds (in the aggregate) will be comprised of corporate bonds that have at the time of original issuance $100 million or more par amount outstanding
11 ldquoAgency securitiesrdquo for these purposes generally includes securities issued by the following entities Government National Mortgage Association (Ginnie Mae) Federal National Mortgage Association (Fannie Mae) Federal Home Loan Banks (FHLBanks) Federal Home Loan Mortgage Corporation (Freddie Mac) Farm Credit System (FCS) Farm Credit Banks (FCBanks) Student Loan Marketing Association (Sallie Mae) Resolution Funding Corporation (REFCORP) Financing Corporation (FICO) and the Farm Credit System (FCS) Financial Assistance Corporation (FAC) Agency securities can include but are not limited to mortgage-backed securities
12 ldquoPrivately-issued securitiesrdquo for these purposes generally includes Rule 144A securities other than mortgage-backed Rule 144A securities Under normal market conditions privately-issued securities will have at the time of original issuance $100 million or more principal amount outstanding to be considered eligible investments
13 Asset-backed securities are securities that are backed by a pool of assets The Fund currently intends to invest in asset-backed securities that are consumer asset-backed securities
14 Mortgage-backed securities which are securities that directly or indirectly represent a participation in or are secured by and payable from mortgage loans on real property will consist of (1) residential mortgage-backed securities (ldquoRMBSrdquo) (2) commercial mortgage-backed securities (ldquoCMBSrdquo) (3) stripped mortgage-backed securities (ldquoSMBSrdquo) which are mortgage-backed securities
SR-NASDAQ-2015-011 Amendment No 2 Page 39 of 64
investment companies16 (including investment companies advised by the Adviser) that
invest primarily in the foregoing types of debt instruments17 (collectively ldquoFloating Rate
Debt Instrumentsrdquo)
where mortgage payments are divided between paying the loanrsquos principal and paying the loanrsquos interest (4) collateralized mortgage obligations (ldquoCMOsrdquo) and real estate mortgage investment conduits (ldquoREMICsrdquo) which are mortgage-backed securities that are divided into multiple classes with each class being entitled to a different share of the principal and interest payments received from the pool of underlying assets
15 The floating-rate loans in which the Fund will invest will represent amounts borrowed by companies or other entities from banks and other lenders and a significant portion of such floating-rate loans may be rated below investment grade or unrated Floating-rate loans held by the Fund may be senior or subordinate obligations of the borrower and may or may not be secured by collateral First lien senior secured floating-rate loans are referred to herein as ldquosenior loansrdquo Floating-rate loans that are not senior loans (ie unsecured floating-rate loans and secured floating-rate loans that are not first lien floating-rate loans) are referred to herein as ldquojunior loansrdquo The Fund will generally invest in floating-rate loans that the Adviser deems to be liquid with readily available prices notwithstanding the foregoing the Fund may invest in floating-rate loans that are deemed illiquid so long as the Fund complies with the 15 limitation on investments of its net assets in illiquid assets described below under ldquoInvestment Restrictionsrdquo
16 The Fund currently anticipates investing only in registered open-end investment companies that are listed and traded in the US on registered exchanges (ie other ETFs) An ETF is an investment company registered under the 1940 Act that holds a portfolio of securities Many ETFs are designed to track the performance of a securities index including industry sector country and region indexes The Fund may invest in the securities of ETFs in excess of the limits imposed under the 1940 Act pursuant to exemptive orders obtained by other ETFs and their sponsors from the Commission In addition the Fund may invest in the securities of certain investment companies in excess of the limits imposed under the 1940 Act pursuant to an exemptive order obtained by the Trust and the Adviser from the Commission See Investment Company Act Release No 30377 (February 5 2013) (File No 812-13895) The ETFs in which the Fund may invest include Index Fund Shares (as described in Nasdaq Rule 5705) Portfolio Depository Receipts (as described in Nasdaq Rule 5705) and Managed Fund Shares (as described in Nasdaq Rule 5735) While the Fund may invest in inverse ETFs the Fund will not invest in leveraged or inverse leveraged (eg 2X or -3X) ETFs
SR-NASDAQ-2015-011 Amendment No 2 Page 40 of 64
At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade To be considered
ldquoinvestment graderdquo under normal market conditions rated Floating Rate Debt
Instruments will carry at the time of purchase a rating in the highest four rating
categories of at least one nationally recognized statistical ratings organization
(ldquoNRSROrdquo) (eg BBB- or higher by Standard amp Poorrsquos Ratings Services (ldquoSampPrdquo)
andor Fitch Ratings (ldquoFitchrdquo) or Baa3 or higher by Moodyrsquos Investors Service Inc
(ldquoMoodyrsquosrdquo)18 For unrated securities to be considered ldquoinvestment graderdquo under normal
market conditions such securities will be determined at the time of purchase to be of
comparable quality19 by the Adviser The Fund may invest up to 35 of its net assets in
securities that are at the time of investment rated below investment grade by each
NRSRO rating such securities (or securities that are unrated and determined by the
17 The liquidity of a security especially in the case of asset-backed and mortgage-backed securities will be a substantial factor in the Fundrsquos security selection process Consistent with the discussion below under ldquoInvestment Restrictionsrdquo the Fund will not purchase any Floating Rate Debt Instruments (including asset-backed securities and mortgage-backed securities) that in the Adviserrsquos opinion are illiquid if as a result more than 15 of the value of the Fundrsquos net assets will be invested in illiquid assets
18 For the avoidance of doubt if a security is rated by multiple NRSROs and receives different ratings the Fund will treat the security as being rated in the highest rating category received from an NRSRO
19 Comparable quality of unrated securities will be determined by the Adviser based on fundamental credit analysis of the unrated security and comparable NRSRO-rated securities On a best efforts basis the Adviser will attempt to make a rating determination based on publicly available data In making a ldquocomparable qualityrdquo determination the Adviser may consider for example whether the issuer of the security has issued other rated securities the nature and provisions of the relevant security whether the obligations under the relevant security are guaranteed by another entity and the rating of such guarantor (if any) relevant cash flows macroeconomic analysis andor sector or industry analysis
SR-NASDAQ-2015-011 Amendment No 2 Page 41 of 64
Adviser to be of comparable quality) commonly referred to as ldquohigh yieldrdquo or ldquojunkrdquo
bonds If subsequent to purchase by the Fund a security held by the Fund experiences a
decline in credit quality and falls below investment grade the Fund may continue to hold
the security and it will not cause the Fund to violate the 35 investment limitation
however the security will be taken into account for purposes of determining whether
purchases of additional securities will cause the Fund to violate such limitation
The Fund will limit its investments in asset-backed securities (excluding agency
mortgage-backed securities) and non-agency mortgage-backed securities (in the
aggregate) to 20 of its net assets20 In addition the Fund will limit its investments in
junior loans to 20 of its net assets
The Fund will hold debt securities (including in the aggregate Floating Rate
Debt Instruments and the fixed-rate debt securities described below) of at least 13
non-affiliated issuers
Other Investments
Under normal market conditions the Fund will invest primarily in the Floating
Rate Debt Instruments described above to meet its investment objective In addition the
Fund may invest up to 20 of its net assets in the following types of fixed-rate debt
securities corporate21 and government bonds and notes agency securities22 instruments
20 For the avoidance of doubt there is no limitation on the Fundrsquos investments in agency mortgage-backed securities
21 See footnote 10 above
22 See footnote 11 above
SR-NASDAQ-2015-011 Amendment No 2 Page 42 of 64
of non-US issuers in developed markets privately-issued securities 23 asset-backed
securities 24 mortgage-backed securities 25 municipal bonds money market securities26
and investment companies27 (including investment companies advised by the Adviser)
that invest primarily in the foregoing types of debt securities
Further to pursue its investment objective the Fund may invest up to 20 of the
value of its net assets in exchange-listed options on US Treasury futures contracts and
exchange-listed US Treasury futures contracts28 The use of these derivative
transactions may allow the Fund to obtain net long or short exposures to selected interest
rates These derivatives may also be used to hedge risks including interest rate risks and
credit risks associated with the Fundrsquos portfolio investments The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
23 See footnote 12 above
24 See footnote 13 above
25 See footnote 14 above
26 ldquoMoney market securitiesrdquo for these purposes generally includes short-term high-quality obligations issued or guaranteed by the US Treasury or the agencies or instrumentalities of the US government short-term high-quality securities issued or guaranteed by non-US governments agencies and instrumentalities repurchase agreements commercial paper (both asset-backed and non-assetshybacked) and deposits and other obligations of US and non-US banks and financial institutions
27 See footnote 16 above
28 At least 90 of the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be invested in instruments that trade in markets that are members of the Intermarket Surveillance Group (ldquoISGrdquo) (see footnote 40 below) or are parties to a comprehensive surveillance sharing agreement with the Exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 43 of 64
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index
Investment Restrictions
The Fund will not invest 25 or more of the value of its total assets in securities
of issuers in any one industry This restriction does not apply to (a) obligations issued or
guaranteed by the US government its agencies or instrumentalities or (b) securities of
other investment companies29
The Fund may hold up to an aggregate amount of 15 of its net assets in illiquid
assets (calculated at the time of investment) including Rule 144A securities deemed
illiquid by the Adviser30 The Fund will monitor its portfolio liquidity on an ongoing
basis to determine whether in light of current circumstances an adequate level of
liquidity is being maintained and will consider taking appropriate steps in order to
maintain adequate liquidity if through a change in values net assets or other
circumstances more than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid
assets include securities subject to contractual or other restrictions on resale and other
29 See Form N-1A Item 9 The Commission has taken the position that a fund is concentrated if it invests more than 25 of the value of its total assets in any one industry See eg Investment Company Act Release No 9011 (October 30 1975) 40 FR 54241 (November 21 1975)
30 In reaching liquidity decisions the Adviser may consider the following factors the frequency of trades and quotes for the security the number of dealers wishing to purchase or sell the security and the number of other potential purchasers dealer undertakings to make a market in the security and the nature of the security and the nature of the marketplace in which it trades (eg the time needed to dispose of the security the method of soliciting offers and the mechanics of transfer)
SR-NASDAQ-2015-011 Amendment No 2 Page 44 of 64
instruments that lack readily available markets as determined in accordance with
Commission staff guidance31
The Fund will not invest in non-US equity securities
Creation and Redemption of Shares
The Fund will issue and redeem Shares on a continuous basis at net asset value
(ldquoNAVrdquo)32 only in large blocks of Shares (ldquoCreation Unitsrdquo) in transactions with
authorized participants generally including broker-dealers and large institutional
investors (ldquoAuthorized Participantsrdquo) Creation Units generally will consist of 50000
Shares although this may change from time to time Creation Units however are not
expected to consist of less than 50000 Shares As described in the Registration
Statement and consistent with the Exemptive Relief the Fund will issue and redeem
Creation Units in exchange for an in-kind portfolio of instruments andor cash in lieu of
31 The Commission has stated that long-standing Commission guidelines have required open-end funds to hold no more than 15 of their net assets in illiquid securities and other illiquid assets See Investment Company Act Release No 28193 (March 11 2008) 73 FR 14618 (March 18 2008) footnote 34 See also Investment Company Act Release No 5847 (October 21 1969) 35 FR 19989 (December 31 1970) (Statement Regarding ldquoRestricted Securitiesrdquo) Investment Company Act Release No 18612 (March 12 1992) 57 FR 9828 (March 20 1992) (Revisions of Guidelines to Form N-1A) A fundrsquos portfolio security is illiquid if it cannot be disposed of in the ordinary course of business within seven days at approximately the value ascribed to it by the fund See Investment Company Act Release No 14983 (March 12 1986) 51 FR 9773 (March 21 1986) (adopting amendments to Rule 2a-7 under the 1940 Act) Investment Company Act Release No 17452 (April 23 1990) 55 FR 17933 (April 30 1990) (adopting Rule 144A under the Securities Act of 1933)
32 The NAV of the Fundrsquos Shares generally will be calculated once daily Monday through Friday as of the close of regular trading on the New York Stock Exchange generally 400 pm Eastern Time (the ldquoNAV Calculation Timerdquo) NAV per Share will be calculated by dividing the Fundrsquos net assets by the number of Fund Shares outstanding For more information regarding the valuation of Fund investments in calculating the Fundrsquos NAV see the Registration Statement
SR-NASDAQ-2015-011 Amendment No 2 Page 45 of 64
such instruments (the ldquoCreation Basketrdquo) In addition if there is a difference between the
NAV attributable to a Creation Unit and the market value of the Creation Basket
exchanged for the Creation Unit the party conveying instruments with the lower value
will pay to the other an amount in cash equal to the difference (referred to as the ldquoCash
Componentrdquo)
Creations and redemptions must be made by or through an Authorized Participant
that has executed an agreement that has been agreed to by the Distributor and BNY with
respect to creations and redemptions of Creation Units All standard orders to create
Creation Units must be received by the transfer agent no later than the closing time of the
regular trading session on the New York Stock Exchange (ordinarily 400 pm Eastern
Time) (the ldquoClosing Timerdquo) in each case on the date such order is placed in order for the
creation of Creation Units to be effected based on the NAV of Shares as next determined
on such date after receipt of the order in proper form Shares may be redeemed only in
Creation Units at their NAV next determined after receipt not later than the Closing Time
of a redemption request in proper form by the Fund through the transfer agent and only
on a business day
The Fundrsquos custodian through the National Securities Clearing Corporation will
make available on each business day prior to the opening of business of the Exchange
the list of the names and quantities of the instruments comprising the Creation Basket as
well as the estimated Cash Component (if any) for that day The published Creation
Basket will apply until a new Creation Basket is announced on the following business
day prior to commencement of trading in the Shares
SR-NASDAQ-2015-011 Amendment No 2 Page 46 of 64
Net Asset Value
The Fundrsquos NAV will be determined as of the close of trading (normally
400 pm Eastern Time) on each day the New York Stock Exchange is open for
business NAV will be calculated for the Fund by taking the market price of the Fundrsquos
total assets including interest or dividends accrued but not yet collected less all
liabilities and dividing such amount by the total number of Shares outstanding The
result rounded to the nearest cent will be the NAV per Share All valuations will be
subject to review by the Board of Trustees of the Trust (ldquoTrust Boardrdquo) or its delegate
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with valuation procedures (which may be revised from time to time) adopted by the Trust
Board (the ldquoValuation Proceduresrdquo) and in accordance with the 1940 Act A market
valuation generally means a valuation (i) obtained from an exchange an independent
pricing service (ldquoPricing Servicerdquo) or a major market maker (or dealer) or (ii) based on a
price quotation or other equivalent indication of value supplied by an exchange a Pricing
Service or a major market maker (or dealer) The information summarized below is
based on the Valuation Procedures as currently in effect however as noted above the
Valuation Procedures are amended from time to time and therefore such information is
subject to change
Certain securities including Floating Rate Debt Instruments in which the Fund
may invest will not be listed on any securities exchange or board of trade Such
securities will typically be bought and sold by institutional investors in individually
negotiated private transactions that function in many respects like an over-the-counter
SR-NASDAQ-2015-011 Amendment No 2 Page 47 of 64
secondary market although typically no formal market makers will exist Certain
securities particularly debt securities will have few or no trades or trade infrequently
and information regarding a specific security may not be widely available or may be
incomplete Accordingly determinations of the fair value of debt securities may be
based on infrequent and dated information Because there is less reliable objective data
available elements of judgment may play a greater role in valuation of debt securities
than for other types of securities Typically Floating Rate Debt Instruments and other
debt securities in which the Fund may invest (other than those described below) will be
valued using information provided by a Pricing Service Debt securities having a
remaining maturity of 60 days or less when purchased will be valued at cost adjusted for
amortization of premiums and accretion of discounts provided the Adviserrsquos pricing
committee (the ldquoPricing Committeerdquo) has determined that the use of amortized cost is an
appropriate reflection of fair value given market and issuer-specific conditions existing at
the time of the determination Overnight repurchase agreements will be valued at cost
and term repurchase agreements (ie those whose maturity exceeds seven days) will be
valued at the average of the bid quotations obtained daily from at least two recognized
dealers
Asset-backed and mortgage-backed securities will generally be valued by using a
Pricing Service If a Pricing Service does not cover a particular asset-backed or
mortgage-backed security or discontinues covering a particular asset-backed or
mortgage-backed security the security will be priced using broker quotes generally
provided by brokers that make or participate in markets in the security To derive values
Pricing Services and broker-dealers may use matrix pricing and valuation models as well
SR-NASDAQ-2015-011 Amendment No 2 Page 48 of 64
as recent market transactions for the same or similar assets As it deems appropriate the
Pricing Committee may determine that a Pricing Service price does not represent an
accurate value of an asset-backed or mortgage-backed security based on broker quotes it
receives a recent trade in the security by the Fund information from a portfolio manager
or other market information In the event that the Pricing Committee determines that the
Pricing Service price is unreliable or inaccurate based on such other information broker
quotes may be used Additionally if the Pricing Committee determines that the price of
an asset-backed or mortgage-backed security obtained from a Pricing Service and
available broker quotes is unreliable or inaccurate due to market conditions or other
reasons or if a Pricing Service price or broker quote is unavailable the security will be
valued using fair value pricing as described below
Equity securities listed on any exchange other than the Exchange will be valued at
the last sale price on the exchange on which they are principally traded on the business
day as of which such value is being determined Equity securities listed on the Exchange
will be valued at the official closing price on the business day as of which such value is
being determined If there has been no sale on such day or no official closing price in
the case of securities traded on the Exchange the securities will be valued using fair
value pricing as described below Equity securities traded on more than one securities
exchange will be valued at the last sale price or official closing price as applicable on
the business day as of which such value is being determined at the close of the exchange
representing the principal market for such securities
Exchange-traded options and futures contracts will be valued at the closing price
in the market where such contracts are principally traded
SR-NASDAQ-2015-011 Amendment No 2 Page 49 of 64
Certain securities including Floating Rate Debt Instruments in which the Fund
will invest will not be able to be priced by pre-established pricing methods Such
securities may be valued by the Trust Board or its delegate at fair value The use of fair
value pricing by the Fund will be governed by the Valuation Procedures and conducted in
accordance with the provisions of the 1940 Act Valuing the Fundrsquos securities using fair
value pricing will result in using prices for those securities that may differ from current
market valuations or official closing prices on the applicable exchange
Availability of Information
The Fundrsquos website (wwwftportfolioscom) which will be publicly available
prior to the public offering of Shares will include a form of the prospectus for the Fund
that may be downloaded The website will include the Sharesrsquo ticker CUSIP and
exchange information along with additional quantitative information updated on a daily
basis including for the Fund (1) daily trading volume the prior business dayrsquos reported
NAV and closing price mid-point of the bidask spread at the time of calculation of such
NAV (the ldquoBidAsk Pricerdquo)33 and a calculation of the premium and discount of the
BidAsk Price against the NAV and (2) data in chart format displaying the frequency
distribution of discounts and premiums of the daily BidAsk Price against the NAV
within appropriate ranges for each of the four previous calendar quarters On each
business day before commencement of trading in Shares in the Regular Market Session34
33 The BidAsk Price of the Fund will be determined using the mid-point of the highest bid and the lowest offer on the Exchange as of the time of calculation of the Fundrsquos NAV The records relating to BidAsk Prices will be retained by the Fund and its service providers
34 See Nasdaq Rule 4120(b)(4) (describing the three trading sessions on the Exchange (1) Pre-Market Session from 4 am to 930 am Eastern Time (2)
SR-NASDAQ-2015-011 Amendment No 2 Page 50 of 64
on the Exchange the Fund will disclose on its website the identities and quantities of the
portfolio of securities and other assets (the ldquoDisclosed Portfoliordquo as defined in Nasdaq
Rule 5735(c)(2)) held by the Fund that will form the basis for the Fundrsquos calculation of
NAV at the end of the business day 35 The Fundrsquos disclosure of derivative positions in
the Disclosed Portfolio will include information that market participants can use to value
these positions intraday On a daily basis the Fund will disclose on the Fundrsquos website
the following information regarding each portfolio holding as applicable to the type of
holding ticker symbol CUSIP number or other identifier if any a description of the
holding (including the type of holding) the identity of the security or other asset or
instrument underlying the holding if any for options the option strike price quantity
held (as measured by for example par value notional value or number of shares
contracts or units) maturity date if any coupon rate if any effective date if any market
value of the holding and percentage weighting of the holding in the Fundrsquos portfolio
The website information will be publicly available at no charge
In addition for the Fund an estimated value defined in Rule 5735(c)(3) as the
ldquoIntraday Indicative Valuerdquo that reflects an estimated intraday value of the Fundrsquos
Disclosed Portfolio will be disseminated Moreover the Intraday Indicative Value
Regular Market Session from 930 am to 4 pm or 415 pm Eastern Time and (3) Post-Market Session from 4 pm or 415 pm to 8 pm Eastern Time)
Under accounting procedures to be followed by the Fund trades made on the prior business day (ldquoTrdquo) will be booked and reflected in NAV on the current business day (ldquoT+1rdquo) Accordingly the Fund will be able to disclose at the beginning of the business day the portfolio that will form the basis for the NAV calculation at the end of the business day
35
SR-NASDAQ-2015-011 Amendment No 2 Page 51 of 64
available on the NASDAQ OMX Information LLC proprietary index data service36 will
be based upon the current value for the components of the Disclosed Portfolio and will be
updated and widely disseminated by one or more major market data vendors and broadly
displayed at least every 15 seconds during the Regular Market Session The Intraday
Indicative Value will be based on quotes and closing prices from the securitiesrsquo local
market and may not reflect events that occur subsequent to the local marketrsquos close
Premiums and discounts between the Intraday Indicative Value and the market price may
occur This should not be viewed as a ldquoreal timerdquo update of the NAV per Share of the
Fund which is calculated only once a day
The dissemination of the Intraday Indicative Value together with the Disclosed
Portfolio will allow investors to determine the value of the underlying portfolio of the
Fund on a daily basis and will provide a close estimate of that value throughout the
trading day
Investors will also be able to obtain the Fundrsquos Statement of Additional
Information (ldquoSAIrdquo) the Fundrsquos annual and semi-annual reports (together ldquoShareholder
Reportsrdquo) and its Form N-CSR and Form N-SAR filed twice a year The Fundrsquos SAI
and Shareholder Reports will be available free upon request from the Fund and those
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or
downloaded from the Commissionrsquos website at wwwsecgov Information regarding
Currently the NASDAQ OMX Global Index Data Service (ldquoGIDSrdquo) is the NASDAQ OMX global index data feed service offering real-time updates daily summary messages and access to widely followed indexes and Intraday Indicative Values for ETFs GIDS provides investment professionals with the daily information needed to track or trade NASDAQ OMX indexes listed ETFs or third-party partner indexes and ETFs
36
SR-NASDAQ-2015-011 Amendment No 2 Page 52 of 64
market price and trading volume of the Shares will be continually available on a real-time
basis throughout the day on brokersrsquo computer screens and other electronic services
Information regarding the previous dayrsquos closing price and trading volume information
for the Shares will be published daily in the financial section of newspapers Quotation
and last sale information for the Shares will be available via Nasdaq proprietary quote
and trade services as well as in accordance with the Unlisted Trading Privileges and the
Consolidated Tape Association (ldquoCTArdquo) plans for the Shares Quotation and last sale
information for the other ETFs in which the Fund will invest will be available via the
quote and trade services of their respective primary exchanges as well as in accordance
with the Unlisted Trading Privileges and the CTA plans as applicable Quotation and
last sale information for US exchange-traded options will be available via the Options
Price Reporting Authority Intraday executable price quotations on Floating Rate Debt
Instruments and other assets not traded on an exchange will be available from major
broker-dealer firms or market data vendors as well as from automated quotation systems
published or other public sources or online information services Additionally the Trade
Reporting and Compliance Engine (ldquoTRACErdquo) of the Financial Industry Regulatory
Authority (ldquoFINRArdquo) will be a source of price information for corporate bonds
privately-issued securities mortgage-backed securities and asset-backed securities to the
extent transactions in such securities are reported to TRACE37 For exchange-traded
Broker-dealers that are FINRA member firms have an obligation to report transactions in specified debt securities to TRACE to the extent required under applicable FINRA rules Generally such debt securities will have at issuance a maturity that exceeds one calendar year
37
SR-NASDAQ-2015-011 Amendment No 2 Page 53 of 64
assets intraday pricing information will be available directly from the applicable listing
exchange
Additional information regarding the Fund and the Shares including investment
strategies risks creation and redemption procedures fees Fund holdings disclosure
policies distributions and taxes will be included in the Registration Statement
Initial and Continued Listing
The Shares will be subject to Rule 5735 which sets forth the initial and continued
listing criteria applicable to Managed Fund Shares The Exchange represents that for
initial andor continued listing the Fund must be in compliance with Rule 10A-338 under
the Act A minimum of 100000 Shares will be outstanding at the commencement of
trading on the Exchange The Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the NAV and the
Disclosed Portfolio will be made available to all market participants at the same time
Trading Halts
With respect to trading halts the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading in the Shares of the Fund Nasdaq will
halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12) Trading may be
halted because of market conditions or for reasons that in the view of the Exchange
make trading in the Shares inadvisable These may include (1) the extent to which
trading is not occurring in the securities andor the other assets constituting the Disclosed
Portfolio of the Fund or (2) whether other unusual conditions or circumstances
See 17 CFR 24010A-3 38
SR-NASDAQ-2015-011 Amendment No 2 Page 54 of 64
detrimental to the maintenance of a fair and orderly market are present Trading in the
Shares also will be subject to Rule 5735(d)(2)(D) which sets forth circumstances under
which Shares of the Fund may be halted
Trading Rules
Nasdaq deems the Shares to be equity securities thus rendering trading in the
Shares subject to Nasdaqrsquos existing rules governing the trading of equity securities
Nasdaq will allow trading in the Shares from 400 am until 800 pm Eastern Time
The Exchange has appropriate rules to facilitate transactions in the Shares during all
trading sessions As provided in Nasdaq Rule 5735(b)(3) the minimum price variation
for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $001
Surveillance
The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws39 The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities laws
The surveillances referred to above generally focus on detecting securities trading
outside their normal patterns which could be indicative of manipulative or other violative
activity When such situations are detected surveillance analysis follows and
FINRA surveils trading on the Exchange pursuant to a regulatory services agreement The Exchange is responsible for FINRArsquos performance under this regulatory services agreement
39
SR-NASDAQ-2015-011 Amendment No 2 Page 55 of 64
investigations are opened where appropriate to review the behavior of all relevant
parties for all relevant trading violations
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 56 of 64
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
SR-NASDAQ-2015-011 Amendment No 2 Page 57 of 64
2 Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
SR-NASDAQ-2015-011 Amendment No 2 Page 58 of 64
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
SR-NASDAQ-2015-011 Amendment No 2 Page 59 of 64
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
SR-NASDAQ-2015-011 Amendment No 2 Page 60 of 64
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 61 of 64
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
SR-NASDAQ-2015-011 Amendment No 2 Page 62 of 64
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
B Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
C Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received From Members Participants or Others
Written comments were neither solicited nor received
III Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Within 45 days of the date of publication of this notice in the Federal Register or
within such longer period (i) as the Commission may designate up to 90 days of such date
if it finds such longer period to be appropriate and publishes its reasons for so finding or
(ii) as to which the Exchange consents the Commission shall (a) by order approve or
disapprove such proposed rule change or (b) institute proceedings to determine whether
the proposed rule change should be disapproved
SR-NASDAQ-2015-011 Amendment No 2 Page 63 of 64
IV Solicitation of Comments
Interested persons are invited to submit written data views and arguments
concerning the foregoing including whether the proposed rule change is consistent with
the Act Comments may be submitted by any of the following methods
Electronic comments
bull Use the Commissionrsquos Internet comment form
(httpwwwsecgovrulessroshtml) or
bull Send an e-mail to rule-commentssecgov Please include File Number
SR-NASDAQ-2015-011 on the subject line
Paper comments
bull Send paper comments in triplicate to Brent J Fields Secretary Securities and
Exchange Commission Station Place 100 F Street NE Washington DC
20549-9303
All submissions should refer to File Number SR-NASDAQ-2015-011 This file number
should be included on the subject line if e-mail is used To help the Commission process
and review your comments more efficiently please use only one method The
Commission will post all comments on the Commissionrsquos Internet website
httpwwwsecgovrulessroshtml
Copies of the submission all subsequent amendments all written statements with
respect to the proposed rule change that are filed with the Commission and all written
communications relating to the proposed rule change between the Commission and any
person other than those that may be withheld from the public in accordance with the
provisions of 5 USC 552 will be available for website viewing and printing in the
Commissionrsquos Public Reference Room 100 F Street NE Washington DC 20549 on
SR-NASDAQ-2015-011 Amendment No 2 Page 64 of 64
official business days between the hours of 1000 am and 300 pm Copies of the filing
also will be available for inspection and copying at the principal office of Nasdaq All
comments received will be posted without change the Commission does not edit
personal identifying information from submissions You should submit only information
that you wish to make available publicly
All submissions should refer to File Number SR-NASDAQ-2015-011 and should
be submitted on or before [insert date 21 days from publication in the Federal Register]
For the Commission by the Division of Trading and Markets pursuant to
delegated authority41
Kevin M OrsquoNeill Deputy Secretary
17 CFR 20030-3(a)(12) 41
SR-NASDAQ-2015-011 Amendment No 2 Page 15 of 64
Net Asset Value
The Fundrsquos NAV will be determined as of the close of trading (normally
400 pm Eastern Time) on each day the New York Stock Exchange is open for
business NAV will be calculated for the Fund by taking the market price of the Fundrsquos
total assets including interest or dividends accrued but not yet collected less all
liabilities and dividing such amount by the total number of Shares outstanding The
result rounded to the nearest cent will be the NAV per Share All valuations will be
subject to review by the Board of Trustees of the Trust (ldquoTrust Boardrdquo) or its delegate
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with valuation procedures (which may be revised from time to time) adopted by the Trust
Board (the ldquoValuation Proceduresrdquo) and in accordance with the 1940 Act A market
valuation generally means a valuation (i) obtained from an exchange an independent
pricing service (ldquoPricing Servicerdquo) or a major market maker (or dealer) or (ii) based on a
price quotation or other equivalent indication of value supplied by an exchange a Pricing
Service or a major market maker (or dealer) The information summarized below is
based on the Valuation Procedures as currently in effect however as noted above the
Valuation Procedures are amended from time to time and therefore such information is
subject to change
Certain securities including Floating Rate Debt Instruments in which the Fund
may invest will not be listed on any securities exchange or board of trade Such
securities will typically be bought and sold by institutional investors in individually
negotiated private transactions that function in many respects like an over-the-counter
SR-NASDAQ-2015-011 Amendment No 2 Page 16 of 64
secondary market although typically no formal market makers will exist Certain
securities particularly debt securities will have few or no trades or trade infrequently
and information regarding a specific security may not be widely available or may be
incomplete Accordingly determinations of the fair value of debt securities may be
based on infrequent and dated information Because there is less reliable objective data
available elements of judgment may play a greater role in valuation of debt securities
than for other types of securities Typically Floating Rate Debt Instruments and other
debt securities in which the Fund may invest (other than those described below) will be
valued using information provided by a Pricing Service Debt securities having a
remaining maturity of 60 days or less when purchased will be valued at cost adjusted for
amortization of premiums and accretion of discounts provided the Adviserrsquos pricing
committee (the ldquoPricing Committeerdquo) has determined that the use of amortized cost is an
appropriate reflection of fair value given market and issuer-specific conditions existing at
the time of the determination Overnight repurchase agreements will be valued at cost
and term repurchase agreements (ie those whose maturity exceeds seven days) will be
valued at the average of the bid quotations obtained daily from at least two recognized
dealers
Asset-backed and mortgage-backed securities will generally be valued by using a
Pricing Service If a Pricing Service does not cover a particular asset-backed or
mortgage-backed security or discontinues covering a particular asset-backed or
mortgage-backed security the security will be priced using broker quotes generally
provided by brokers that make or participate in markets in the security To derive values
Pricing Services and broker-dealers may use matrix pricing and valuation models as well
SR-NASDAQ-2015-011 Amendment No 2 Page 17 of 64
as recent market transactions for the same or similar assets As it deems appropriate the
Pricing Committee may determine that a Pricing Service price does not represent an
accurate value of an asset-backed or mortgage-backed security based on broker quotes it
receives a recent trade in the security by the Fund information from a portfolio manager
or other market information In the event that the Pricing Committee determines that the
Pricing Service price is unreliable or inaccurate based on such other information broker
quotes may be used Additionally if the Pricing Committee determines that the price of
an asset-backed or mortgage-backed security obtained from a Pricing Service and
available broker quotes is unreliable or inaccurate due to market conditions or other
reasons or if a Pricing Service price or broker quote is unavailable the security will be
valued using fair value pricing as described below
Equity securities listed on any exchange other than the Exchange will be valued at
the last sale price on the exchange on which they are principally traded on the business
day as of which such value is being determined Equity securities listed on the Exchange
will be valued at the official closing price on the business day as of which such value is
being determined If there has been no sale on such day or no official closing price in
the case of securities traded on the Exchange the securities will be valued using fair
value pricing as described below Equity securities traded on more than one securities
exchange will be valued at the last sale price or official closing price as applicable on
the business day as of which such value is being determined at the close of the exchange
representing the principal market for such securities
Exchange-traded options and futures contracts will be valued at the closing price
in the market where such contracts are principally traded
SR-NASDAQ-2015-011 Amendment No 2 Page 18 of 64
Certain securities including Floating Rate Debt Instruments in which the Fund
will invest will not be able to be priced by pre-established pricing methods Such
securities may be valued by the Trust Board or its delegate at fair value The use of fair
value pricing by the Fund will be governed by the Valuation Procedures and conducted in
accordance with the provisions of the 1940 Act Valuing the Fundrsquos securities using fair
value pricing will result in using prices for those securities that may differ from current
market valuations or official closing prices on the applicable exchange
Availability of Information
The Fundrsquos website (wwwftportfolioscom) which will be publicly available
prior to the public offering of Shares will include a form of the prospectus for the Fund
that may be downloaded The website will include the Sharesrsquo ticker CUSIP and
exchange information along with additional quantitative information updated on a daily
basis including for the Fund (1) daily trading volume the prior business dayrsquos reported
NAV and closing price mid-point of the bidask spread at the time of calculation of such
NAV (the ldquoBidAsk Pricerdquo)33 and a calculation of the premium and discount of the
BidAsk Price against the NAV and (2) data in chart format displaying the frequency
distribution of discounts and premiums of the daily BidAsk Price against the NAV
within appropriate ranges for each of the four previous calendar quarters On each
business day before commencement of trading in Shares in the Regular Market Session34
33 The BidAsk Price of the Fund will be determined using the mid-point of the highest bid and the lowest offer on the Exchange as of the time of calculation of the Fundrsquos NAV The records relating to BidAsk Prices will be retained by the Fund and its service providers
34 See Nasdaq Rule 4120(b)(4) (describing the three trading sessions on the Exchange (1) Pre-Market Session from 4 am to 930 am Eastern Time (2)
SR-NASDAQ-2015-011 Amendment No 2 Page 19 of 64
on the Exchange the Fund will disclose on its website the identities and quantities of the
portfolio of securities and other assets (the ldquoDisclosed Portfoliordquo as defined in Nasdaq
Rule 5735(c)(2)) held by the Fund that will form the basis for the Fundrsquos calculation of
NAV at the end of the business day 35 The Fundrsquos disclosure of derivative positions in
the Disclosed Portfolio will include information that market participants can use to value
these positions intraday On a daily basis the Fund will disclose on the Fundrsquos website
the following information regarding each portfolio holding as applicable to the type of
holding ticker symbol CUSIP number or other identifier if any a description of the
holding (including the type of holding) the identity of the security or other asset or
instrument underlying the holding if any for options the option strike price quantity
held (as measured by for example par value notional value or number of shares
contracts or units) maturity date if any coupon rate if any effective date if any market
value of the holding and percentage weighting of the holding in the Fundrsquos portfolio
The website information will be publicly available at no charge
In addition for the Fund an estimated value defined in Rule 5735(c)(3) as the
ldquoIntraday Indicative Valuerdquo that reflects an estimated intraday value of the Fundrsquos
Disclosed Portfolio will be disseminated Moreover the Intraday Indicative Value
Regular Market Session from 930 am to 4 pm or 415 pm Eastern Time and (3) Post-Market Session from 4 pm or 415 pm to 8 pm Eastern Time)
Under accounting procedures to be followed by the Fund trades made on the prior business day (ldquoTrdquo) will be booked and reflected in NAV on the current business day (ldquoT+1rdquo) Accordingly the Fund will be able to disclose at the beginning of the business day the portfolio that will form the basis for the NAV calculation at the end of the business day
35
SR-NASDAQ-2015-011 Amendment No 2 Page 20 of 64
available on the NASDAQ OMX Information LLC proprietary index data service36 will
be based upon the current value for the components of the Disclosed Portfolio and will be
updated and widely disseminated by one or more major market data vendors and broadly
displayed at least every 15 seconds during the Regular Market Session The Intraday
Indicative Value will be based on quotes and closing prices from the securitiesrsquo local
market and may not reflect events that occur subsequent to the local marketrsquos close
Premiums and discounts between the Intraday Indicative Value and the market price may
occur This should not be viewed as a ldquoreal timerdquo update of the NAV per Share of the
Fund which is calculated only once a day
The dissemination of the Intraday Indicative Value together with the Disclosed
Portfolio will allow investors to determine the value of the underlying portfolio of the
Fund on a daily basis and will provide a close estimate of that value throughout the
trading day
Investors will also be able to obtain the Fundrsquos Statement of Additional
Information (ldquoSAIrdquo) the Fundrsquos annual and semi-annual reports (together ldquoShareholder
Reportsrdquo) and its Form N-CSR and Form N-SAR filed twice a year The Fundrsquos SAI
and Shareholder Reports will be available free upon request from the Fund and those
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or
downloaded from the Commissionrsquos website at wwwsecgov Information regarding
market price and trading volume of the Shares will be continually available on a real-time
Currently the NASDAQ OMX Global Index Data Service (ldquoGIDSrdquo) is the NASDAQ OMX global index data feed service offering real-time updates daily summary messages and access to widely followed indexes and Intraday Indicative Values for ETFs GIDS provides investment professionals with the daily information needed to track or trade NASDAQ OMX indexes listed ETFs or third-party partner indexes and ETFs
36
SR-NASDAQ-2015-011 Amendment No 2 Page 21 of 64
basis throughout the day on brokersrsquo computer screens and other electronic services
Information regarding the previous dayrsquos closing price and trading volume information
for the Shares will be published daily in the financial section of newspapers Quotation
and last sale information for the Shares will be available via Nasdaq proprietary quote
and trade services as well as in accordance with the Unlisted Trading Privileges and the
Consolidated Tape Association (ldquoCTArdquo) plans for the Shares Quotation and last sale
information for the other ETFs in which the Fund will invest will be available via the
quote and trade services of their respective primary exchanges as well as in accordance
with the Unlisted Trading Privileges and the CTA plans as applicable Quotation and
last sale information for US exchange-traded options will be available via the Options
Price Reporting Authority Intraday executable price quotations on Floating Rate Debt
Instruments and other assets not traded on an exchange will be available from major
broker-dealer firms or market data vendors as well as from automated quotation systems
published or other public sources or online information services Additionally the Trade
Reporting and Compliance Engine (ldquoTRACErdquo) of the Financial Industry Regulatory
Authority (ldquoFINRArdquo) will be a source of price information for corporate bonds
privately-issued securities mortgage-backed securities and asset-backed securities to the
extent transactions in such securities are reported to TRACE37 For exchange-traded
assets intraday pricing information will be available directly from the applicable listing
exchange
Broker-dealers that are FINRA member firms have an obligation to report transactions in specified debt securities to TRACE to the extent required under applicable FINRA rules Generally such debt securities will have at issuance a maturity that exceeds one calendar year
37
SR-NASDAQ-2015-011 Amendment No 2 Page 22 of 64
Additional information regarding the Fund and the Shares including investment
strategies risks creation and redemption procedures fees Fund holdings disclosure
policies distributions and taxes will be included in the Registration Statement
Initial and Continued Listing
The Shares will be subject to Rule 5735 which sets forth the initial and continued
listing criteria applicable to Managed Fund Shares The Exchange represents that for
initial andor continued listing the Fund must be in compliance with Rule 10A-338 under
the Act A minimum of 100000 Shares will be outstanding at the commencement of
trading on the Exchange The Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the NAV and the
Disclosed Portfolio will be made available to all market participants at the same time
Trading Halts
With respect to trading halts the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading in the Shares of the Fund Nasdaq will
halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12) Trading may be
halted because of market conditions or for reasons that in the view of the Exchange
make trading in the Shares inadvisable These may include (1) the extent to which
trading is not occurring in the securities andor the other assets constituting the Disclosed
Portfolio of the Fund or (2) whether other unusual conditions or circumstances
detrimental to the maintenance of a fair and orderly market are present Trading in the
See 17 CFR 24010A-3 38
SR-NASDAQ-2015-011 Amendment No 2 Page 23 of 64
Shares also will be subject to Rule 5735(d)(2)(D) which sets forth circumstances under
which Shares of the Fund may be halted
Trading Rules
Nasdaq deems the Shares to be equity securities thus rendering trading in the
Shares subject to Nasdaqrsquos existing rules governing the trading of equity securities
Nasdaq will allow trading in the Shares from 400 am until 800 pm Eastern Time
The Exchange has appropriate rules to facilitate transactions in the Shares during all
trading sessions As provided in Nasdaq Rule 5735(b)(3) the minimum price variation
for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $001
Surveillance
The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws39 The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities laws
The surveillances referred to above generally focus on detecting securities trading
outside their normal patterns which could be indicative of manipulative or other violative
activity When such situations are detected surveillance analysis follows and
investigations are opened where appropriate to review the behavior of all relevant
parties for all relevant trading violations
FINRA surveils trading on the Exchange pursuant to a regulatory services agreement The Exchange is responsible for FINRArsquos performance under this regulatory services agreement
39
SR-NASDAQ-2015-011 Amendment No 2 Page 24 of 64
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 25 of 64
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
b Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
SR-NASDAQ-2015-011 Amendment No 2 Page 26 of 64
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
SR-NASDAQ-2015-011 Amendment No 2 Page 27 of 64
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
SR-NASDAQ-2015-011 Amendment No 2 Page 28 of 64
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
SR-NASDAQ-2015-011 Amendment No 2 Page 29 of 64
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
SR-NASDAQ-2015-011 Amendment No 2 Page 30 of 64
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
SR-NASDAQ-2015-011 Amendment No 2 Page 31 of 64
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
4 Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
5 Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received from Members Participants or Others
Written comments were neither solicited nor received
6 Extension of Time Period for Commission Action
The Exchange does not consent at this time to an extension of any time period for
Commission action
7 Basis for Summary Effectiveness Pursuant to Section 19(b)(3) or for Accelerated Effectiveness Pursuant to Section 19(b)(2)
Not applicable
8 Proposed Rule Change Based on Rules of Another Self-Regulatory Organization or of the Commission
Not applicable
9 Security-Based Swap Submissions Filed Pursuant to Section 3C of the Act
Not applicable
SR-NASDAQ-2015-011 Amendment No 2 Page 32 of 64
10 Advance Notices Filed Pursuant to Section 806(e) of the Payment Clearing and Settlement Supervision Act
Not applicable
11 Exhibits
1 Completed notice of proposed rule change for publication in the Federal
Register
SR-NASDAQ-2015-011 Amendment No 2 Page 33 of 64
EXHIBIT 1
SECURITIES AND EXCHANGE COMMISSION (Release No 34shy File No SR-NASDAQ-2015-011)
April __ 2015
Self-Regulatory Organizations The NASDAQ Stock Market LLC Notice of Filing of Proposed Rule Change Relating to the Listing and Trading of the Shares of the First Trust Strategic Floating Rate ETF of First Trust Exchange-Traded Fund IV
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (ldquoActrdquo)1 and
Rule 19b-4 thereunder2 notice is hereby given that on February 12 2015 The NASDAQ
Stock Market LLC (ldquoNasdaqrdquo or the ldquoExchangerdquo) filed with the Securities and Exchange
Commission (ldquoCommissionrdquo) the proposed rule change as described in in Items I II and
III below which Items have been prepared by Nasdaq On April 6 2015 Nasdaq filed
Amendment No 1 which replaced the text of the original filing in its entirety On April
15 2015 Nasdaq filed Amendment No 2 which replaced the text of the original filing in
its entirety The Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons
I Self-Regulatory Organizationrsquos Statement of the Terms of Substance of the Proposed Rule Change
Nasdaq proposes to list and trade the shares of the First Trust Strategic Floating
Rate ETF (the ldquoFundrdquo) of the First Trust Strategic Floating Rate ETF (the ldquoFundrdquo) of
First Trust Exchange-Traded Fund IV (the ldquoTrustrdquo) under Nasdaq Rule 5735 (ldquoManaged
1 15 USC 78s(b)(1)
2 17 CFR 24019b-4
SR-NASDAQ-2015-011 Amendment No 2 Page 34 of 64
Fund Sharesrdquo)3 The shares of the Fund are collectively referred to herein as the
ldquoSharesrdquo
The text of the proposed rule change is available at
httpnasdaqcchwallstreetcom at Nasdaqrsquos principal office and at the Commissionrsquos
Public Reference Room
II Self-Regulatory Organizationrsquos Statement of the Purpose of and Statutory Basis for the Proposed Rule Change
In its filing with the Commission Nasdaq included statements concerning the
purpose of and basis for the proposed rule change The text of these statements may be
examined at the places specified in Item IV below Nasdaq has prepared summaries set
forth in Sections A B and C below of the most significant aspects of such statements
A Self-Regulatory Organizationrsquos Statement of the Purpose of and Statutory Basis for the Proposed Rule Change
1 Purpose
The Exchange proposes to list and trade the Shares of the Fund under Nasdaq
Rule 5735 which governs the listing and trading of Managed Fund Shares4 on the
3 The Commission approved Nasdaq Rule 5735 in Securities Exchange Act Release No 57962 (June 13 2008) 73 FR 35175 (June 20 2008) (SR-NASDAQ-2008shy039) There are already multiple actively-managed funds listed on the Exchange see eg Securities Exchange Act Release Nos 69464 (April 26 2013) 78 FR 25774 (May 2 2013) (SR-NASDAQ-2013-036) (order approving listing and trading of First Trust Senior Loan Fund) 68972 (February 22 2013) 78 FR 13721 (February 28 2013) (SR-NASDAQ-2012-147) (order approving listing and trading of First Trust High Yield LongShort ETF) 66489 (February 29 2012) 77 FR 13379 (March 6 2012) (SR-NASDAQ-2012-004) (order approving listing and trading of WisdomTree Emerging Markets Corporate Bond Fund) The Exchange believes the proposed rule change raises no significant issues not previously addressed in those prior Commission orders
4 A Managed Fund Share is a security that represents an interest in an investment company registered under the Investment Company Act of 1940 (15 USC 80ashy
SR-NASDAQ-2015-011 Amendment No 2 Page 35 of 64
Exchange The Fund will be an actively-managed exchange-traded fund (ldquoETFrdquo) The
Shares will be offered by the Trust which was established as a Massachusetts business
trust on September 15 20105 The Trust is registered with the Commission as an
investment company and has filed a registration statement on Form N-1A (ldquoRegistration
Statementrdquo) with the Commission6 The Fund will be a series of the Trust The Fund
intends to qualify each year as a regulated investment company (ldquoRICrdquo) under
Subchapter M of the Internal Revenue Code of 1986 as amended
First Trust Advisors LP will be the investment adviser (ldquoAdviserrdquo) to the Fund
First Trust Portfolios LP (the ldquoDistributorrdquo) will be the principal underwriter and
distributor of the Fundrsquos Shares The Bank of New York Mellon Corporation (ldquoBNYrdquo)
will act as the administrator accounting agent custodian and transfer agent to the Fund
1) (the ldquo1940 Actrdquo) organized as an open-end investment company or similar entity that invests in a portfolio of securities selected by its investment adviser consistent with its investment objectives and policies In contrast an open-end investment company that issues Index Fund Shares listed and traded on the Exchange under Nasdaq Rule 5705 seeks to provide investment results that correspond generally to the price and yield performance of a specific foreign or domestic stock index fixed income securities index or combination thereof
5 The Commission has issued an order upon which the Trust may rely granting certain exemptive relief under the 1940 Act See Investment Company Act Release No 30029 (April 10 2012) (File No 812-13795) (the ldquoExemptive Reliefrdquo) In addition the Commission has issued no-action relief upon which the Trust may rely pertaining to the Fundrsquos ability to invest in derivatives notwithstanding certain representations in the application for the Exemptive Relief See Commission No-Action Letter (December 6 2012)
6 See Post-Effective Amendment No 104 to Registration Statement on Form N-1A for the Trust dated January 29 2015 (File Nos 333-174332 and 811-22559) The descriptions of the Fund and the Shares contained herein are based in part on information in the Registration Statement
7
SR-NASDAQ-2015-011 Amendment No 2 Page 36 of 64
Paragraph (g) of Rule 5735 provides that if the investment adviser to the
investment company issuing Managed Fund Shares is affiliated with a broker-dealer
such investment adviser shall erect a ldquofire wallrdquo between the investment adviser and the
broker-dealer with respect to access to information concerning the composition andor
changes to such investment company portfolio7 In addition paragraph (g) further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio Rule 5735(g) is similar
to Nasdaq Rule 5705(b)(5)(A)(i) however paragraph (g) in connection with the
establishment of a ldquofire wallrdquo between the investment adviser and the broker-dealer
reflects the applicable open-end fundrsquos portfolio not an underlying benchmark index as
is the case with index-based funds The Adviser is not a broker-dealer although it is
affiliated with the Distributor a broker-dealer The Adviser has implemented a fire wall
An investment adviser to an open-end fund is required to be registered under the Investment Advisers Act of 1940 (the ldquoAdvisers Actrdquo) As a result the Adviser and its related personnel are subject to the provisions of Rule 204A-1 under the Advisers Act relating to codes of ethics This Rule requires investment advisers to adopt a code of ethics that reflects the fiduciary nature of the relationship to clients as well as compliance with other applicable securities laws Accordingly procedures designed to prevent the communication and misuse of non-public information by an investment adviser must be consistent with Rule 204A-1 under the Advisers Act In addition Rule 206(4)-7 under the Advisers Act makes it unlawful for an investment adviser to provide investment advice to clients unless such investment adviser has (i) adopted and implemented written policies and procedures reasonably designed to prevent violation by the investment adviser and its supervised persons of the Advisers Act and the Commission rules adopted thereunder (ii) implemented at a minimum an annual review regarding the adequacy of the policies and procedures established pursuant to subparagraph (i) above and the effectiveness of their implementation and (iii) designated an individual (who is a supervised person) responsible for administering the policies and procedures adopted under subparagraph (i) above
8
SR-NASDAQ-2015-011 Amendment No 2 Page 37 of 64
with respect to its broker-dealer affiliate regarding access to information concerning the
composition andor changes to the portfolio In addition personnel who make decisions
on the Fundrsquos portfolio composition will be subject to procedures designed to prevent the
use and dissemination of material non-public information regarding the Fundrsquos portfolio
In the event (a) the Adviser becomes or becomes newly affiliated with a broker-dealer
or (b) any new adviser or sub-adviser is a registered broker-dealer or becomes affiliated
with another broker-dealer it will implement a fire wall with respect to its relevant
personnel andor such broker-dealer affiliate as applicable regarding access to
information concerning the composition andor changes to the portfolio and will be
subject to procedures designed to prevent the use and dissemination of material
non-public information regarding such portfolio The Fund does not currently intend to
use a sub-adviser
First Trust Strategic Floating Rate ETF
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions8 at least 80 of its
The term ldquounder normal market conditionsrdquo as used herein includes but is not limited to the absence of adverse market economic political or other conditions including extreme volatility or trading halts in the fixed income markets or the financial markets generally operational issues causing dissemination of inaccurate market information or force majeure type events such as systems failure natural or man-made disaster act of God armed conflict act of terrorism riot or labor disruption or any similar intervening circumstance For temporary defensive purposes during the initial invest-up period and during periods of high cash inflows or outflows the Fund may depart from its principal investment strategies for example it may hold a higher than normal proportion of its assets in cash During such periods the Fund may not be able to achieve its investment objective The Fund may adopt a defensive strategy when the Adviser believes securities in which the Fund normally invests have elevated risks due to political or economic factors and in other extraordinary circumstances
SR-NASDAQ-2015-011 Amendment No 2 Page 38 of 64
net assets in a portfolio of the following types of floating-rate9 debt instruments issued by
US and non-US public- and private-sector entities floating-rate corporate10 and
government bonds and notes floating-rate agency securities 11 floating-rate instruments
of non-US issuers floating-rate privately-issued securities 12 floating-rate asset-backed
securities 13 floating-rate mortgage-backed securities14 floating-rate loans 15 and
9 For the avoidance of doubt the term ldquofloating-raterdquo shall also include similar terms such as ldquovariable-raterdquo and ldquoadjustable-raterdquo
10 The Adviser expects that under normal market conditions generally for a corporate bond to be considered as an eligible investment after taking into account such an investment at least 75 of the Fundrsquos net assets that are invested in floating-rate corporate bonds and as described below fixed-rate corporate bonds (in the aggregate) will be comprised of corporate bonds that have at the time of original issuance $100 million or more par amount outstanding
11 ldquoAgency securitiesrdquo for these purposes generally includes securities issued by the following entities Government National Mortgage Association (Ginnie Mae) Federal National Mortgage Association (Fannie Mae) Federal Home Loan Banks (FHLBanks) Federal Home Loan Mortgage Corporation (Freddie Mac) Farm Credit System (FCS) Farm Credit Banks (FCBanks) Student Loan Marketing Association (Sallie Mae) Resolution Funding Corporation (REFCORP) Financing Corporation (FICO) and the Farm Credit System (FCS) Financial Assistance Corporation (FAC) Agency securities can include but are not limited to mortgage-backed securities
12 ldquoPrivately-issued securitiesrdquo for these purposes generally includes Rule 144A securities other than mortgage-backed Rule 144A securities Under normal market conditions privately-issued securities will have at the time of original issuance $100 million or more principal amount outstanding to be considered eligible investments
13 Asset-backed securities are securities that are backed by a pool of assets The Fund currently intends to invest in asset-backed securities that are consumer asset-backed securities
14 Mortgage-backed securities which are securities that directly or indirectly represent a participation in or are secured by and payable from mortgage loans on real property will consist of (1) residential mortgage-backed securities (ldquoRMBSrdquo) (2) commercial mortgage-backed securities (ldquoCMBSrdquo) (3) stripped mortgage-backed securities (ldquoSMBSrdquo) which are mortgage-backed securities
SR-NASDAQ-2015-011 Amendment No 2 Page 39 of 64
investment companies16 (including investment companies advised by the Adviser) that
invest primarily in the foregoing types of debt instruments17 (collectively ldquoFloating Rate
Debt Instrumentsrdquo)
where mortgage payments are divided between paying the loanrsquos principal and paying the loanrsquos interest (4) collateralized mortgage obligations (ldquoCMOsrdquo) and real estate mortgage investment conduits (ldquoREMICsrdquo) which are mortgage-backed securities that are divided into multiple classes with each class being entitled to a different share of the principal and interest payments received from the pool of underlying assets
15 The floating-rate loans in which the Fund will invest will represent amounts borrowed by companies or other entities from banks and other lenders and a significant portion of such floating-rate loans may be rated below investment grade or unrated Floating-rate loans held by the Fund may be senior or subordinate obligations of the borrower and may or may not be secured by collateral First lien senior secured floating-rate loans are referred to herein as ldquosenior loansrdquo Floating-rate loans that are not senior loans (ie unsecured floating-rate loans and secured floating-rate loans that are not first lien floating-rate loans) are referred to herein as ldquojunior loansrdquo The Fund will generally invest in floating-rate loans that the Adviser deems to be liquid with readily available prices notwithstanding the foregoing the Fund may invest in floating-rate loans that are deemed illiquid so long as the Fund complies with the 15 limitation on investments of its net assets in illiquid assets described below under ldquoInvestment Restrictionsrdquo
16 The Fund currently anticipates investing only in registered open-end investment companies that are listed and traded in the US on registered exchanges (ie other ETFs) An ETF is an investment company registered under the 1940 Act that holds a portfolio of securities Many ETFs are designed to track the performance of a securities index including industry sector country and region indexes The Fund may invest in the securities of ETFs in excess of the limits imposed under the 1940 Act pursuant to exemptive orders obtained by other ETFs and their sponsors from the Commission In addition the Fund may invest in the securities of certain investment companies in excess of the limits imposed under the 1940 Act pursuant to an exemptive order obtained by the Trust and the Adviser from the Commission See Investment Company Act Release No 30377 (February 5 2013) (File No 812-13895) The ETFs in which the Fund may invest include Index Fund Shares (as described in Nasdaq Rule 5705) Portfolio Depository Receipts (as described in Nasdaq Rule 5705) and Managed Fund Shares (as described in Nasdaq Rule 5735) While the Fund may invest in inverse ETFs the Fund will not invest in leveraged or inverse leveraged (eg 2X or -3X) ETFs
SR-NASDAQ-2015-011 Amendment No 2 Page 40 of 64
At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade To be considered
ldquoinvestment graderdquo under normal market conditions rated Floating Rate Debt
Instruments will carry at the time of purchase a rating in the highest four rating
categories of at least one nationally recognized statistical ratings organization
(ldquoNRSROrdquo) (eg BBB- or higher by Standard amp Poorrsquos Ratings Services (ldquoSampPrdquo)
andor Fitch Ratings (ldquoFitchrdquo) or Baa3 or higher by Moodyrsquos Investors Service Inc
(ldquoMoodyrsquosrdquo)18 For unrated securities to be considered ldquoinvestment graderdquo under normal
market conditions such securities will be determined at the time of purchase to be of
comparable quality19 by the Adviser The Fund may invest up to 35 of its net assets in
securities that are at the time of investment rated below investment grade by each
NRSRO rating such securities (or securities that are unrated and determined by the
17 The liquidity of a security especially in the case of asset-backed and mortgage-backed securities will be a substantial factor in the Fundrsquos security selection process Consistent with the discussion below under ldquoInvestment Restrictionsrdquo the Fund will not purchase any Floating Rate Debt Instruments (including asset-backed securities and mortgage-backed securities) that in the Adviserrsquos opinion are illiquid if as a result more than 15 of the value of the Fundrsquos net assets will be invested in illiquid assets
18 For the avoidance of doubt if a security is rated by multiple NRSROs and receives different ratings the Fund will treat the security as being rated in the highest rating category received from an NRSRO
19 Comparable quality of unrated securities will be determined by the Adviser based on fundamental credit analysis of the unrated security and comparable NRSRO-rated securities On a best efforts basis the Adviser will attempt to make a rating determination based on publicly available data In making a ldquocomparable qualityrdquo determination the Adviser may consider for example whether the issuer of the security has issued other rated securities the nature and provisions of the relevant security whether the obligations under the relevant security are guaranteed by another entity and the rating of such guarantor (if any) relevant cash flows macroeconomic analysis andor sector or industry analysis
SR-NASDAQ-2015-011 Amendment No 2 Page 41 of 64
Adviser to be of comparable quality) commonly referred to as ldquohigh yieldrdquo or ldquojunkrdquo
bonds If subsequent to purchase by the Fund a security held by the Fund experiences a
decline in credit quality and falls below investment grade the Fund may continue to hold
the security and it will not cause the Fund to violate the 35 investment limitation
however the security will be taken into account for purposes of determining whether
purchases of additional securities will cause the Fund to violate such limitation
The Fund will limit its investments in asset-backed securities (excluding agency
mortgage-backed securities) and non-agency mortgage-backed securities (in the
aggregate) to 20 of its net assets20 In addition the Fund will limit its investments in
junior loans to 20 of its net assets
The Fund will hold debt securities (including in the aggregate Floating Rate
Debt Instruments and the fixed-rate debt securities described below) of at least 13
non-affiliated issuers
Other Investments
Under normal market conditions the Fund will invest primarily in the Floating
Rate Debt Instruments described above to meet its investment objective In addition the
Fund may invest up to 20 of its net assets in the following types of fixed-rate debt
securities corporate21 and government bonds and notes agency securities22 instruments
20 For the avoidance of doubt there is no limitation on the Fundrsquos investments in agency mortgage-backed securities
21 See footnote 10 above
22 See footnote 11 above
SR-NASDAQ-2015-011 Amendment No 2 Page 42 of 64
of non-US issuers in developed markets privately-issued securities 23 asset-backed
securities 24 mortgage-backed securities 25 municipal bonds money market securities26
and investment companies27 (including investment companies advised by the Adviser)
that invest primarily in the foregoing types of debt securities
Further to pursue its investment objective the Fund may invest up to 20 of the
value of its net assets in exchange-listed options on US Treasury futures contracts and
exchange-listed US Treasury futures contracts28 The use of these derivative
transactions may allow the Fund to obtain net long or short exposures to selected interest
rates These derivatives may also be used to hedge risks including interest rate risks and
credit risks associated with the Fundrsquos portfolio investments The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
23 See footnote 12 above
24 See footnote 13 above
25 See footnote 14 above
26 ldquoMoney market securitiesrdquo for these purposes generally includes short-term high-quality obligations issued or guaranteed by the US Treasury or the agencies or instrumentalities of the US government short-term high-quality securities issued or guaranteed by non-US governments agencies and instrumentalities repurchase agreements commercial paper (both asset-backed and non-assetshybacked) and deposits and other obligations of US and non-US banks and financial institutions
27 See footnote 16 above
28 At least 90 of the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be invested in instruments that trade in markets that are members of the Intermarket Surveillance Group (ldquoISGrdquo) (see footnote 40 below) or are parties to a comprehensive surveillance sharing agreement with the Exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 43 of 64
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index
Investment Restrictions
The Fund will not invest 25 or more of the value of its total assets in securities
of issuers in any one industry This restriction does not apply to (a) obligations issued or
guaranteed by the US government its agencies or instrumentalities or (b) securities of
other investment companies29
The Fund may hold up to an aggregate amount of 15 of its net assets in illiquid
assets (calculated at the time of investment) including Rule 144A securities deemed
illiquid by the Adviser30 The Fund will monitor its portfolio liquidity on an ongoing
basis to determine whether in light of current circumstances an adequate level of
liquidity is being maintained and will consider taking appropriate steps in order to
maintain adequate liquidity if through a change in values net assets or other
circumstances more than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid
assets include securities subject to contractual or other restrictions on resale and other
29 See Form N-1A Item 9 The Commission has taken the position that a fund is concentrated if it invests more than 25 of the value of its total assets in any one industry See eg Investment Company Act Release No 9011 (October 30 1975) 40 FR 54241 (November 21 1975)
30 In reaching liquidity decisions the Adviser may consider the following factors the frequency of trades and quotes for the security the number of dealers wishing to purchase or sell the security and the number of other potential purchasers dealer undertakings to make a market in the security and the nature of the security and the nature of the marketplace in which it trades (eg the time needed to dispose of the security the method of soliciting offers and the mechanics of transfer)
SR-NASDAQ-2015-011 Amendment No 2 Page 44 of 64
instruments that lack readily available markets as determined in accordance with
Commission staff guidance31
The Fund will not invest in non-US equity securities
Creation and Redemption of Shares
The Fund will issue and redeem Shares on a continuous basis at net asset value
(ldquoNAVrdquo)32 only in large blocks of Shares (ldquoCreation Unitsrdquo) in transactions with
authorized participants generally including broker-dealers and large institutional
investors (ldquoAuthorized Participantsrdquo) Creation Units generally will consist of 50000
Shares although this may change from time to time Creation Units however are not
expected to consist of less than 50000 Shares As described in the Registration
Statement and consistent with the Exemptive Relief the Fund will issue and redeem
Creation Units in exchange for an in-kind portfolio of instruments andor cash in lieu of
31 The Commission has stated that long-standing Commission guidelines have required open-end funds to hold no more than 15 of their net assets in illiquid securities and other illiquid assets See Investment Company Act Release No 28193 (March 11 2008) 73 FR 14618 (March 18 2008) footnote 34 See also Investment Company Act Release No 5847 (October 21 1969) 35 FR 19989 (December 31 1970) (Statement Regarding ldquoRestricted Securitiesrdquo) Investment Company Act Release No 18612 (March 12 1992) 57 FR 9828 (March 20 1992) (Revisions of Guidelines to Form N-1A) A fundrsquos portfolio security is illiquid if it cannot be disposed of in the ordinary course of business within seven days at approximately the value ascribed to it by the fund See Investment Company Act Release No 14983 (March 12 1986) 51 FR 9773 (March 21 1986) (adopting amendments to Rule 2a-7 under the 1940 Act) Investment Company Act Release No 17452 (April 23 1990) 55 FR 17933 (April 30 1990) (adopting Rule 144A under the Securities Act of 1933)
32 The NAV of the Fundrsquos Shares generally will be calculated once daily Monday through Friday as of the close of regular trading on the New York Stock Exchange generally 400 pm Eastern Time (the ldquoNAV Calculation Timerdquo) NAV per Share will be calculated by dividing the Fundrsquos net assets by the number of Fund Shares outstanding For more information regarding the valuation of Fund investments in calculating the Fundrsquos NAV see the Registration Statement
SR-NASDAQ-2015-011 Amendment No 2 Page 45 of 64
such instruments (the ldquoCreation Basketrdquo) In addition if there is a difference between the
NAV attributable to a Creation Unit and the market value of the Creation Basket
exchanged for the Creation Unit the party conveying instruments with the lower value
will pay to the other an amount in cash equal to the difference (referred to as the ldquoCash
Componentrdquo)
Creations and redemptions must be made by or through an Authorized Participant
that has executed an agreement that has been agreed to by the Distributor and BNY with
respect to creations and redemptions of Creation Units All standard orders to create
Creation Units must be received by the transfer agent no later than the closing time of the
regular trading session on the New York Stock Exchange (ordinarily 400 pm Eastern
Time) (the ldquoClosing Timerdquo) in each case on the date such order is placed in order for the
creation of Creation Units to be effected based on the NAV of Shares as next determined
on such date after receipt of the order in proper form Shares may be redeemed only in
Creation Units at their NAV next determined after receipt not later than the Closing Time
of a redemption request in proper form by the Fund through the transfer agent and only
on a business day
The Fundrsquos custodian through the National Securities Clearing Corporation will
make available on each business day prior to the opening of business of the Exchange
the list of the names and quantities of the instruments comprising the Creation Basket as
well as the estimated Cash Component (if any) for that day The published Creation
Basket will apply until a new Creation Basket is announced on the following business
day prior to commencement of trading in the Shares
SR-NASDAQ-2015-011 Amendment No 2 Page 46 of 64
Net Asset Value
The Fundrsquos NAV will be determined as of the close of trading (normally
400 pm Eastern Time) on each day the New York Stock Exchange is open for
business NAV will be calculated for the Fund by taking the market price of the Fundrsquos
total assets including interest or dividends accrued but not yet collected less all
liabilities and dividing such amount by the total number of Shares outstanding The
result rounded to the nearest cent will be the NAV per Share All valuations will be
subject to review by the Board of Trustees of the Trust (ldquoTrust Boardrdquo) or its delegate
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with valuation procedures (which may be revised from time to time) adopted by the Trust
Board (the ldquoValuation Proceduresrdquo) and in accordance with the 1940 Act A market
valuation generally means a valuation (i) obtained from an exchange an independent
pricing service (ldquoPricing Servicerdquo) or a major market maker (or dealer) or (ii) based on a
price quotation or other equivalent indication of value supplied by an exchange a Pricing
Service or a major market maker (or dealer) The information summarized below is
based on the Valuation Procedures as currently in effect however as noted above the
Valuation Procedures are amended from time to time and therefore such information is
subject to change
Certain securities including Floating Rate Debt Instruments in which the Fund
may invest will not be listed on any securities exchange or board of trade Such
securities will typically be bought and sold by institutional investors in individually
negotiated private transactions that function in many respects like an over-the-counter
SR-NASDAQ-2015-011 Amendment No 2 Page 47 of 64
secondary market although typically no formal market makers will exist Certain
securities particularly debt securities will have few or no trades or trade infrequently
and information regarding a specific security may not be widely available or may be
incomplete Accordingly determinations of the fair value of debt securities may be
based on infrequent and dated information Because there is less reliable objective data
available elements of judgment may play a greater role in valuation of debt securities
than for other types of securities Typically Floating Rate Debt Instruments and other
debt securities in which the Fund may invest (other than those described below) will be
valued using information provided by a Pricing Service Debt securities having a
remaining maturity of 60 days or less when purchased will be valued at cost adjusted for
amortization of premiums and accretion of discounts provided the Adviserrsquos pricing
committee (the ldquoPricing Committeerdquo) has determined that the use of amortized cost is an
appropriate reflection of fair value given market and issuer-specific conditions existing at
the time of the determination Overnight repurchase agreements will be valued at cost
and term repurchase agreements (ie those whose maturity exceeds seven days) will be
valued at the average of the bid quotations obtained daily from at least two recognized
dealers
Asset-backed and mortgage-backed securities will generally be valued by using a
Pricing Service If a Pricing Service does not cover a particular asset-backed or
mortgage-backed security or discontinues covering a particular asset-backed or
mortgage-backed security the security will be priced using broker quotes generally
provided by brokers that make or participate in markets in the security To derive values
Pricing Services and broker-dealers may use matrix pricing and valuation models as well
SR-NASDAQ-2015-011 Amendment No 2 Page 48 of 64
as recent market transactions for the same or similar assets As it deems appropriate the
Pricing Committee may determine that a Pricing Service price does not represent an
accurate value of an asset-backed or mortgage-backed security based on broker quotes it
receives a recent trade in the security by the Fund information from a portfolio manager
or other market information In the event that the Pricing Committee determines that the
Pricing Service price is unreliable or inaccurate based on such other information broker
quotes may be used Additionally if the Pricing Committee determines that the price of
an asset-backed or mortgage-backed security obtained from a Pricing Service and
available broker quotes is unreliable or inaccurate due to market conditions or other
reasons or if a Pricing Service price or broker quote is unavailable the security will be
valued using fair value pricing as described below
Equity securities listed on any exchange other than the Exchange will be valued at
the last sale price on the exchange on which they are principally traded on the business
day as of which such value is being determined Equity securities listed on the Exchange
will be valued at the official closing price on the business day as of which such value is
being determined If there has been no sale on such day or no official closing price in
the case of securities traded on the Exchange the securities will be valued using fair
value pricing as described below Equity securities traded on more than one securities
exchange will be valued at the last sale price or official closing price as applicable on
the business day as of which such value is being determined at the close of the exchange
representing the principal market for such securities
Exchange-traded options and futures contracts will be valued at the closing price
in the market where such contracts are principally traded
SR-NASDAQ-2015-011 Amendment No 2 Page 49 of 64
Certain securities including Floating Rate Debt Instruments in which the Fund
will invest will not be able to be priced by pre-established pricing methods Such
securities may be valued by the Trust Board or its delegate at fair value The use of fair
value pricing by the Fund will be governed by the Valuation Procedures and conducted in
accordance with the provisions of the 1940 Act Valuing the Fundrsquos securities using fair
value pricing will result in using prices for those securities that may differ from current
market valuations or official closing prices on the applicable exchange
Availability of Information
The Fundrsquos website (wwwftportfolioscom) which will be publicly available
prior to the public offering of Shares will include a form of the prospectus for the Fund
that may be downloaded The website will include the Sharesrsquo ticker CUSIP and
exchange information along with additional quantitative information updated on a daily
basis including for the Fund (1) daily trading volume the prior business dayrsquos reported
NAV and closing price mid-point of the bidask spread at the time of calculation of such
NAV (the ldquoBidAsk Pricerdquo)33 and a calculation of the premium and discount of the
BidAsk Price against the NAV and (2) data in chart format displaying the frequency
distribution of discounts and premiums of the daily BidAsk Price against the NAV
within appropriate ranges for each of the four previous calendar quarters On each
business day before commencement of trading in Shares in the Regular Market Session34
33 The BidAsk Price of the Fund will be determined using the mid-point of the highest bid and the lowest offer on the Exchange as of the time of calculation of the Fundrsquos NAV The records relating to BidAsk Prices will be retained by the Fund and its service providers
34 See Nasdaq Rule 4120(b)(4) (describing the three trading sessions on the Exchange (1) Pre-Market Session from 4 am to 930 am Eastern Time (2)
SR-NASDAQ-2015-011 Amendment No 2 Page 50 of 64
on the Exchange the Fund will disclose on its website the identities and quantities of the
portfolio of securities and other assets (the ldquoDisclosed Portfoliordquo as defined in Nasdaq
Rule 5735(c)(2)) held by the Fund that will form the basis for the Fundrsquos calculation of
NAV at the end of the business day 35 The Fundrsquos disclosure of derivative positions in
the Disclosed Portfolio will include information that market participants can use to value
these positions intraday On a daily basis the Fund will disclose on the Fundrsquos website
the following information regarding each portfolio holding as applicable to the type of
holding ticker symbol CUSIP number or other identifier if any a description of the
holding (including the type of holding) the identity of the security or other asset or
instrument underlying the holding if any for options the option strike price quantity
held (as measured by for example par value notional value or number of shares
contracts or units) maturity date if any coupon rate if any effective date if any market
value of the holding and percentage weighting of the holding in the Fundrsquos portfolio
The website information will be publicly available at no charge
In addition for the Fund an estimated value defined in Rule 5735(c)(3) as the
ldquoIntraday Indicative Valuerdquo that reflects an estimated intraday value of the Fundrsquos
Disclosed Portfolio will be disseminated Moreover the Intraday Indicative Value
Regular Market Session from 930 am to 4 pm or 415 pm Eastern Time and (3) Post-Market Session from 4 pm or 415 pm to 8 pm Eastern Time)
Under accounting procedures to be followed by the Fund trades made on the prior business day (ldquoTrdquo) will be booked and reflected in NAV on the current business day (ldquoT+1rdquo) Accordingly the Fund will be able to disclose at the beginning of the business day the portfolio that will form the basis for the NAV calculation at the end of the business day
35
SR-NASDAQ-2015-011 Amendment No 2 Page 51 of 64
available on the NASDAQ OMX Information LLC proprietary index data service36 will
be based upon the current value for the components of the Disclosed Portfolio and will be
updated and widely disseminated by one or more major market data vendors and broadly
displayed at least every 15 seconds during the Regular Market Session The Intraday
Indicative Value will be based on quotes and closing prices from the securitiesrsquo local
market and may not reflect events that occur subsequent to the local marketrsquos close
Premiums and discounts between the Intraday Indicative Value and the market price may
occur This should not be viewed as a ldquoreal timerdquo update of the NAV per Share of the
Fund which is calculated only once a day
The dissemination of the Intraday Indicative Value together with the Disclosed
Portfolio will allow investors to determine the value of the underlying portfolio of the
Fund on a daily basis and will provide a close estimate of that value throughout the
trading day
Investors will also be able to obtain the Fundrsquos Statement of Additional
Information (ldquoSAIrdquo) the Fundrsquos annual and semi-annual reports (together ldquoShareholder
Reportsrdquo) and its Form N-CSR and Form N-SAR filed twice a year The Fundrsquos SAI
and Shareholder Reports will be available free upon request from the Fund and those
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or
downloaded from the Commissionrsquos website at wwwsecgov Information regarding
Currently the NASDAQ OMX Global Index Data Service (ldquoGIDSrdquo) is the NASDAQ OMX global index data feed service offering real-time updates daily summary messages and access to widely followed indexes and Intraday Indicative Values for ETFs GIDS provides investment professionals with the daily information needed to track or trade NASDAQ OMX indexes listed ETFs or third-party partner indexes and ETFs
36
SR-NASDAQ-2015-011 Amendment No 2 Page 52 of 64
market price and trading volume of the Shares will be continually available on a real-time
basis throughout the day on brokersrsquo computer screens and other electronic services
Information regarding the previous dayrsquos closing price and trading volume information
for the Shares will be published daily in the financial section of newspapers Quotation
and last sale information for the Shares will be available via Nasdaq proprietary quote
and trade services as well as in accordance with the Unlisted Trading Privileges and the
Consolidated Tape Association (ldquoCTArdquo) plans for the Shares Quotation and last sale
information for the other ETFs in which the Fund will invest will be available via the
quote and trade services of their respective primary exchanges as well as in accordance
with the Unlisted Trading Privileges and the CTA plans as applicable Quotation and
last sale information for US exchange-traded options will be available via the Options
Price Reporting Authority Intraday executable price quotations on Floating Rate Debt
Instruments and other assets not traded on an exchange will be available from major
broker-dealer firms or market data vendors as well as from automated quotation systems
published or other public sources or online information services Additionally the Trade
Reporting and Compliance Engine (ldquoTRACErdquo) of the Financial Industry Regulatory
Authority (ldquoFINRArdquo) will be a source of price information for corporate bonds
privately-issued securities mortgage-backed securities and asset-backed securities to the
extent transactions in such securities are reported to TRACE37 For exchange-traded
Broker-dealers that are FINRA member firms have an obligation to report transactions in specified debt securities to TRACE to the extent required under applicable FINRA rules Generally such debt securities will have at issuance a maturity that exceeds one calendar year
37
SR-NASDAQ-2015-011 Amendment No 2 Page 53 of 64
assets intraday pricing information will be available directly from the applicable listing
exchange
Additional information regarding the Fund and the Shares including investment
strategies risks creation and redemption procedures fees Fund holdings disclosure
policies distributions and taxes will be included in the Registration Statement
Initial and Continued Listing
The Shares will be subject to Rule 5735 which sets forth the initial and continued
listing criteria applicable to Managed Fund Shares The Exchange represents that for
initial andor continued listing the Fund must be in compliance with Rule 10A-338 under
the Act A minimum of 100000 Shares will be outstanding at the commencement of
trading on the Exchange The Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the NAV and the
Disclosed Portfolio will be made available to all market participants at the same time
Trading Halts
With respect to trading halts the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading in the Shares of the Fund Nasdaq will
halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12) Trading may be
halted because of market conditions or for reasons that in the view of the Exchange
make trading in the Shares inadvisable These may include (1) the extent to which
trading is not occurring in the securities andor the other assets constituting the Disclosed
Portfolio of the Fund or (2) whether other unusual conditions or circumstances
See 17 CFR 24010A-3 38
SR-NASDAQ-2015-011 Amendment No 2 Page 54 of 64
detrimental to the maintenance of a fair and orderly market are present Trading in the
Shares also will be subject to Rule 5735(d)(2)(D) which sets forth circumstances under
which Shares of the Fund may be halted
Trading Rules
Nasdaq deems the Shares to be equity securities thus rendering trading in the
Shares subject to Nasdaqrsquos existing rules governing the trading of equity securities
Nasdaq will allow trading in the Shares from 400 am until 800 pm Eastern Time
The Exchange has appropriate rules to facilitate transactions in the Shares during all
trading sessions As provided in Nasdaq Rule 5735(b)(3) the minimum price variation
for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $001
Surveillance
The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws39 The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities laws
The surveillances referred to above generally focus on detecting securities trading
outside their normal patterns which could be indicative of manipulative or other violative
activity When such situations are detected surveillance analysis follows and
FINRA surveils trading on the Exchange pursuant to a regulatory services agreement The Exchange is responsible for FINRArsquos performance under this regulatory services agreement
39
SR-NASDAQ-2015-011 Amendment No 2 Page 55 of 64
investigations are opened where appropriate to review the behavior of all relevant
parties for all relevant trading violations
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 56 of 64
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
SR-NASDAQ-2015-011 Amendment No 2 Page 57 of 64
2 Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
SR-NASDAQ-2015-011 Amendment No 2 Page 58 of 64
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
SR-NASDAQ-2015-011 Amendment No 2 Page 59 of 64
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
SR-NASDAQ-2015-011 Amendment No 2 Page 60 of 64
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 61 of 64
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
SR-NASDAQ-2015-011 Amendment No 2 Page 62 of 64
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
B Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
C Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received From Members Participants or Others
Written comments were neither solicited nor received
III Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Within 45 days of the date of publication of this notice in the Federal Register or
within such longer period (i) as the Commission may designate up to 90 days of such date
if it finds such longer period to be appropriate and publishes its reasons for so finding or
(ii) as to which the Exchange consents the Commission shall (a) by order approve or
disapprove such proposed rule change or (b) institute proceedings to determine whether
the proposed rule change should be disapproved
SR-NASDAQ-2015-011 Amendment No 2 Page 63 of 64
IV Solicitation of Comments
Interested persons are invited to submit written data views and arguments
concerning the foregoing including whether the proposed rule change is consistent with
the Act Comments may be submitted by any of the following methods
Electronic comments
bull Use the Commissionrsquos Internet comment form
(httpwwwsecgovrulessroshtml) or
bull Send an e-mail to rule-commentssecgov Please include File Number
SR-NASDAQ-2015-011 on the subject line
Paper comments
bull Send paper comments in triplicate to Brent J Fields Secretary Securities and
Exchange Commission Station Place 100 F Street NE Washington DC
20549-9303
All submissions should refer to File Number SR-NASDAQ-2015-011 This file number
should be included on the subject line if e-mail is used To help the Commission process
and review your comments more efficiently please use only one method The
Commission will post all comments on the Commissionrsquos Internet website
httpwwwsecgovrulessroshtml
Copies of the submission all subsequent amendments all written statements with
respect to the proposed rule change that are filed with the Commission and all written
communications relating to the proposed rule change between the Commission and any
person other than those that may be withheld from the public in accordance with the
provisions of 5 USC 552 will be available for website viewing and printing in the
Commissionrsquos Public Reference Room 100 F Street NE Washington DC 20549 on
SR-NASDAQ-2015-011 Amendment No 2 Page 64 of 64
official business days between the hours of 1000 am and 300 pm Copies of the filing
also will be available for inspection and copying at the principal office of Nasdaq All
comments received will be posted without change the Commission does not edit
personal identifying information from submissions You should submit only information
that you wish to make available publicly
All submissions should refer to File Number SR-NASDAQ-2015-011 and should
be submitted on or before [insert date 21 days from publication in the Federal Register]
For the Commission by the Division of Trading and Markets pursuant to
delegated authority41
Kevin M OrsquoNeill Deputy Secretary
17 CFR 20030-3(a)(12) 41
SR-NASDAQ-2015-011 Amendment No 2 Page 16 of 64
secondary market although typically no formal market makers will exist Certain
securities particularly debt securities will have few or no trades or trade infrequently
and information regarding a specific security may not be widely available or may be
incomplete Accordingly determinations of the fair value of debt securities may be
based on infrequent and dated information Because there is less reliable objective data
available elements of judgment may play a greater role in valuation of debt securities
than for other types of securities Typically Floating Rate Debt Instruments and other
debt securities in which the Fund may invest (other than those described below) will be
valued using information provided by a Pricing Service Debt securities having a
remaining maturity of 60 days or less when purchased will be valued at cost adjusted for
amortization of premiums and accretion of discounts provided the Adviserrsquos pricing
committee (the ldquoPricing Committeerdquo) has determined that the use of amortized cost is an
appropriate reflection of fair value given market and issuer-specific conditions existing at
the time of the determination Overnight repurchase agreements will be valued at cost
and term repurchase agreements (ie those whose maturity exceeds seven days) will be
valued at the average of the bid quotations obtained daily from at least two recognized
dealers
Asset-backed and mortgage-backed securities will generally be valued by using a
Pricing Service If a Pricing Service does not cover a particular asset-backed or
mortgage-backed security or discontinues covering a particular asset-backed or
mortgage-backed security the security will be priced using broker quotes generally
provided by brokers that make or participate in markets in the security To derive values
Pricing Services and broker-dealers may use matrix pricing and valuation models as well
SR-NASDAQ-2015-011 Amendment No 2 Page 17 of 64
as recent market transactions for the same or similar assets As it deems appropriate the
Pricing Committee may determine that a Pricing Service price does not represent an
accurate value of an asset-backed or mortgage-backed security based on broker quotes it
receives a recent trade in the security by the Fund information from a portfolio manager
or other market information In the event that the Pricing Committee determines that the
Pricing Service price is unreliable or inaccurate based on such other information broker
quotes may be used Additionally if the Pricing Committee determines that the price of
an asset-backed or mortgage-backed security obtained from a Pricing Service and
available broker quotes is unreliable or inaccurate due to market conditions or other
reasons or if a Pricing Service price or broker quote is unavailable the security will be
valued using fair value pricing as described below
Equity securities listed on any exchange other than the Exchange will be valued at
the last sale price on the exchange on which they are principally traded on the business
day as of which such value is being determined Equity securities listed on the Exchange
will be valued at the official closing price on the business day as of which such value is
being determined If there has been no sale on such day or no official closing price in
the case of securities traded on the Exchange the securities will be valued using fair
value pricing as described below Equity securities traded on more than one securities
exchange will be valued at the last sale price or official closing price as applicable on
the business day as of which such value is being determined at the close of the exchange
representing the principal market for such securities
Exchange-traded options and futures contracts will be valued at the closing price
in the market where such contracts are principally traded
SR-NASDAQ-2015-011 Amendment No 2 Page 18 of 64
Certain securities including Floating Rate Debt Instruments in which the Fund
will invest will not be able to be priced by pre-established pricing methods Such
securities may be valued by the Trust Board or its delegate at fair value The use of fair
value pricing by the Fund will be governed by the Valuation Procedures and conducted in
accordance with the provisions of the 1940 Act Valuing the Fundrsquos securities using fair
value pricing will result in using prices for those securities that may differ from current
market valuations or official closing prices on the applicable exchange
Availability of Information
The Fundrsquos website (wwwftportfolioscom) which will be publicly available
prior to the public offering of Shares will include a form of the prospectus for the Fund
that may be downloaded The website will include the Sharesrsquo ticker CUSIP and
exchange information along with additional quantitative information updated on a daily
basis including for the Fund (1) daily trading volume the prior business dayrsquos reported
NAV and closing price mid-point of the bidask spread at the time of calculation of such
NAV (the ldquoBidAsk Pricerdquo)33 and a calculation of the premium and discount of the
BidAsk Price against the NAV and (2) data in chart format displaying the frequency
distribution of discounts and premiums of the daily BidAsk Price against the NAV
within appropriate ranges for each of the four previous calendar quarters On each
business day before commencement of trading in Shares in the Regular Market Session34
33 The BidAsk Price of the Fund will be determined using the mid-point of the highest bid and the lowest offer on the Exchange as of the time of calculation of the Fundrsquos NAV The records relating to BidAsk Prices will be retained by the Fund and its service providers
34 See Nasdaq Rule 4120(b)(4) (describing the three trading sessions on the Exchange (1) Pre-Market Session from 4 am to 930 am Eastern Time (2)
SR-NASDAQ-2015-011 Amendment No 2 Page 19 of 64
on the Exchange the Fund will disclose on its website the identities and quantities of the
portfolio of securities and other assets (the ldquoDisclosed Portfoliordquo as defined in Nasdaq
Rule 5735(c)(2)) held by the Fund that will form the basis for the Fundrsquos calculation of
NAV at the end of the business day 35 The Fundrsquos disclosure of derivative positions in
the Disclosed Portfolio will include information that market participants can use to value
these positions intraday On a daily basis the Fund will disclose on the Fundrsquos website
the following information regarding each portfolio holding as applicable to the type of
holding ticker symbol CUSIP number or other identifier if any a description of the
holding (including the type of holding) the identity of the security or other asset or
instrument underlying the holding if any for options the option strike price quantity
held (as measured by for example par value notional value or number of shares
contracts or units) maturity date if any coupon rate if any effective date if any market
value of the holding and percentage weighting of the holding in the Fundrsquos portfolio
The website information will be publicly available at no charge
In addition for the Fund an estimated value defined in Rule 5735(c)(3) as the
ldquoIntraday Indicative Valuerdquo that reflects an estimated intraday value of the Fundrsquos
Disclosed Portfolio will be disseminated Moreover the Intraday Indicative Value
Regular Market Session from 930 am to 4 pm or 415 pm Eastern Time and (3) Post-Market Session from 4 pm or 415 pm to 8 pm Eastern Time)
Under accounting procedures to be followed by the Fund trades made on the prior business day (ldquoTrdquo) will be booked and reflected in NAV on the current business day (ldquoT+1rdquo) Accordingly the Fund will be able to disclose at the beginning of the business day the portfolio that will form the basis for the NAV calculation at the end of the business day
35
SR-NASDAQ-2015-011 Amendment No 2 Page 20 of 64
available on the NASDAQ OMX Information LLC proprietary index data service36 will
be based upon the current value for the components of the Disclosed Portfolio and will be
updated and widely disseminated by one or more major market data vendors and broadly
displayed at least every 15 seconds during the Regular Market Session The Intraday
Indicative Value will be based on quotes and closing prices from the securitiesrsquo local
market and may not reflect events that occur subsequent to the local marketrsquos close
Premiums and discounts between the Intraday Indicative Value and the market price may
occur This should not be viewed as a ldquoreal timerdquo update of the NAV per Share of the
Fund which is calculated only once a day
The dissemination of the Intraday Indicative Value together with the Disclosed
Portfolio will allow investors to determine the value of the underlying portfolio of the
Fund on a daily basis and will provide a close estimate of that value throughout the
trading day
Investors will also be able to obtain the Fundrsquos Statement of Additional
Information (ldquoSAIrdquo) the Fundrsquos annual and semi-annual reports (together ldquoShareholder
Reportsrdquo) and its Form N-CSR and Form N-SAR filed twice a year The Fundrsquos SAI
and Shareholder Reports will be available free upon request from the Fund and those
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or
downloaded from the Commissionrsquos website at wwwsecgov Information regarding
market price and trading volume of the Shares will be continually available on a real-time
Currently the NASDAQ OMX Global Index Data Service (ldquoGIDSrdquo) is the NASDAQ OMX global index data feed service offering real-time updates daily summary messages and access to widely followed indexes and Intraday Indicative Values for ETFs GIDS provides investment professionals with the daily information needed to track or trade NASDAQ OMX indexes listed ETFs or third-party partner indexes and ETFs
36
SR-NASDAQ-2015-011 Amendment No 2 Page 21 of 64
basis throughout the day on brokersrsquo computer screens and other electronic services
Information regarding the previous dayrsquos closing price and trading volume information
for the Shares will be published daily in the financial section of newspapers Quotation
and last sale information for the Shares will be available via Nasdaq proprietary quote
and trade services as well as in accordance with the Unlisted Trading Privileges and the
Consolidated Tape Association (ldquoCTArdquo) plans for the Shares Quotation and last sale
information for the other ETFs in which the Fund will invest will be available via the
quote and trade services of their respective primary exchanges as well as in accordance
with the Unlisted Trading Privileges and the CTA plans as applicable Quotation and
last sale information for US exchange-traded options will be available via the Options
Price Reporting Authority Intraday executable price quotations on Floating Rate Debt
Instruments and other assets not traded on an exchange will be available from major
broker-dealer firms or market data vendors as well as from automated quotation systems
published or other public sources or online information services Additionally the Trade
Reporting and Compliance Engine (ldquoTRACErdquo) of the Financial Industry Regulatory
Authority (ldquoFINRArdquo) will be a source of price information for corporate bonds
privately-issued securities mortgage-backed securities and asset-backed securities to the
extent transactions in such securities are reported to TRACE37 For exchange-traded
assets intraday pricing information will be available directly from the applicable listing
exchange
Broker-dealers that are FINRA member firms have an obligation to report transactions in specified debt securities to TRACE to the extent required under applicable FINRA rules Generally such debt securities will have at issuance a maturity that exceeds one calendar year
37
SR-NASDAQ-2015-011 Amendment No 2 Page 22 of 64
Additional information regarding the Fund and the Shares including investment
strategies risks creation and redemption procedures fees Fund holdings disclosure
policies distributions and taxes will be included in the Registration Statement
Initial and Continued Listing
The Shares will be subject to Rule 5735 which sets forth the initial and continued
listing criteria applicable to Managed Fund Shares The Exchange represents that for
initial andor continued listing the Fund must be in compliance with Rule 10A-338 under
the Act A minimum of 100000 Shares will be outstanding at the commencement of
trading on the Exchange The Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the NAV and the
Disclosed Portfolio will be made available to all market participants at the same time
Trading Halts
With respect to trading halts the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading in the Shares of the Fund Nasdaq will
halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12) Trading may be
halted because of market conditions or for reasons that in the view of the Exchange
make trading in the Shares inadvisable These may include (1) the extent to which
trading is not occurring in the securities andor the other assets constituting the Disclosed
Portfolio of the Fund or (2) whether other unusual conditions or circumstances
detrimental to the maintenance of a fair and orderly market are present Trading in the
See 17 CFR 24010A-3 38
SR-NASDAQ-2015-011 Amendment No 2 Page 23 of 64
Shares also will be subject to Rule 5735(d)(2)(D) which sets forth circumstances under
which Shares of the Fund may be halted
Trading Rules
Nasdaq deems the Shares to be equity securities thus rendering trading in the
Shares subject to Nasdaqrsquos existing rules governing the trading of equity securities
Nasdaq will allow trading in the Shares from 400 am until 800 pm Eastern Time
The Exchange has appropriate rules to facilitate transactions in the Shares during all
trading sessions As provided in Nasdaq Rule 5735(b)(3) the minimum price variation
for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $001
Surveillance
The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws39 The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities laws
The surveillances referred to above generally focus on detecting securities trading
outside their normal patterns which could be indicative of manipulative or other violative
activity When such situations are detected surveillance analysis follows and
investigations are opened where appropriate to review the behavior of all relevant
parties for all relevant trading violations
FINRA surveils trading on the Exchange pursuant to a regulatory services agreement The Exchange is responsible for FINRArsquos performance under this regulatory services agreement
39
SR-NASDAQ-2015-011 Amendment No 2 Page 24 of 64
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 25 of 64
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
b Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
SR-NASDAQ-2015-011 Amendment No 2 Page 26 of 64
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
SR-NASDAQ-2015-011 Amendment No 2 Page 27 of 64
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
SR-NASDAQ-2015-011 Amendment No 2 Page 28 of 64
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
SR-NASDAQ-2015-011 Amendment No 2 Page 29 of 64
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
SR-NASDAQ-2015-011 Amendment No 2 Page 30 of 64
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
SR-NASDAQ-2015-011 Amendment No 2 Page 31 of 64
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
4 Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
5 Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received from Members Participants or Others
Written comments were neither solicited nor received
6 Extension of Time Period for Commission Action
The Exchange does not consent at this time to an extension of any time period for
Commission action
7 Basis for Summary Effectiveness Pursuant to Section 19(b)(3) or for Accelerated Effectiveness Pursuant to Section 19(b)(2)
Not applicable
8 Proposed Rule Change Based on Rules of Another Self-Regulatory Organization or of the Commission
Not applicable
9 Security-Based Swap Submissions Filed Pursuant to Section 3C of the Act
Not applicable
SR-NASDAQ-2015-011 Amendment No 2 Page 32 of 64
10 Advance Notices Filed Pursuant to Section 806(e) of the Payment Clearing and Settlement Supervision Act
Not applicable
11 Exhibits
1 Completed notice of proposed rule change for publication in the Federal
Register
SR-NASDAQ-2015-011 Amendment No 2 Page 33 of 64
EXHIBIT 1
SECURITIES AND EXCHANGE COMMISSION (Release No 34shy File No SR-NASDAQ-2015-011)
April __ 2015
Self-Regulatory Organizations The NASDAQ Stock Market LLC Notice of Filing of Proposed Rule Change Relating to the Listing and Trading of the Shares of the First Trust Strategic Floating Rate ETF of First Trust Exchange-Traded Fund IV
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (ldquoActrdquo)1 and
Rule 19b-4 thereunder2 notice is hereby given that on February 12 2015 The NASDAQ
Stock Market LLC (ldquoNasdaqrdquo or the ldquoExchangerdquo) filed with the Securities and Exchange
Commission (ldquoCommissionrdquo) the proposed rule change as described in in Items I II and
III below which Items have been prepared by Nasdaq On April 6 2015 Nasdaq filed
Amendment No 1 which replaced the text of the original filing in its entirety On April
15 2015 Nasdaq filed Amendment No 2 which replaced the text of the original filing in
its entirety The Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons
I Self-Regulatory Organizationrsquos Statement of the Terms of Substance of the Proposed Rule Change
Nasdaq proposes to list and trade the shares of the First Trust Strategic Floating
Rate ETF (the ldquoFundrdquo) of the First Trust Strategic Floating Rate ETF (the ldquoFundrdquo) of
First Trust Exchange-Traded Fund IV (the ldquoTrustrdquo) under Nasdaq Rule 5735 (ldquoManaged
1 15 USC 78s(b)(1)
2 17 CFR 24019b-4
SR-NASDAQ-2015-011 Amendment No 2 Page 34 of 64
Fund Sharesrdquo)3 The shares of the Fund are collectively referred to herein as the
ldquoSharesrdquo
The text of the proposed rule change is available at
httpnasdaqcchwallstreetcom at Nasdaqrsquos principal office and at the Commissionrsquos
Public Reference Room
II Self-Regulatory Organizationrsquos Statement of the Purpose of and Statutory Basis for the Proposed Rule Change
In its filing with the Commission Nasdaq included statements concerning the
purpose of and basis for the proposed rule change The text of these statements may be
examined at the places specified in Item IV below Nasdaq has prepared summaries set
forth in Sections A B and C below of the most significant aspects of such statements
A Self-Regulatory Organizationrsquos Statement of the Purpose of and Statutory Basis for the Proposed Rule Change
1 Purpose
The Exchange proposes to list and trade the Shares of the Fund under Nasdaq
Rule 5735 which governs the listing and trading of Managed Fund Shares4 on the
3 The Commission approved Nasdaq Rule 5735 in Securities Exchange Act Release No 57962 (June 13 2008) 73 FR 35175 (June 20 2008) (SR-NASDAQ-2008shy039) There are already multiple actively-managed funds listed on the Exchange see eg Securities Exchange Act Release Nos 69464 (April 26 2013) 78 FR 25774 (May 2 2013) (SR-NASDAQ-2013-036) (order approving listing and trading of First Trust Senior Loan Fund) 68972 (February 22 2013) 78 FR 13721 (February 28 2013) (SR-NASDAQ-2012-147) (order approving listing and trading of First Trust High Yield LongShort ETF) 66489 (February 29 2012) 77 FR 13379 (March 6 2012) (SR-NASDAQ-2012-004) (order approving listing and trading of WisdomTree Emerging Markets Corporate Bond Fund) The Exchange believes the proposed rule change raises no significant issues not previously addressed in those prior Commission orders
4 A Managed Fund Share is a security that represents an interest in an investment company registered under the Investment Company Act of 1940 (15 USC 80ashy
SR-NASDAQ-2015-011 Amendment No 2 Page 35 of 64
Exchange The Fund will be an actively-managed exchange-traded fund (ldquoETFrdquo) The
Shares will be offered by the Trust which was established as a Massachusetts business
trust on September 15 20105 The Trust is registered with the Commission as an
investment company and has filed a registration statement on Form N-1A (ldquoRegistration
Statementrdquo) with the Commission6 The Fund will be a series of the Trust The Fund
intends to qualify each year as a regulated investment company (ldquoRICrdquo) under
Subchapter M of the Internal Revenue Code of 1986 as amended
First Trust Advisors LP will be the investment adviser (ldquoAdviserrdquo) to the Fund
First Trust Portfolios LP (the ldquoDistributorrdquo) will be the principal underwriter and
distributor of the Fundrsquos Shares The Bank of New York Mellon Corporation (ldquoBNYrdquo)
will act as the administrator accounting agent custodian and transfer agent to the Fund
1) (the ldquo1940 Actrdquo) organized as an open-end investment company or similar entity that invests in a portfolio of securities selected by its investment adviser consistent with its investment objectives and policies In contrast an open-end investment company that issues Index Fund Shares listed and traded on the Exchange under Nasdaq Rule 5705 seeks to provide investment results that correspond generally to the price and yield performance of a specific foreign or domestic stock index fixed income securities index or combination thereof
5 The Commission has issued an order upon which the Trust may rely granting certain exemptive relief under the 1940 Act See Investment Company Act Release No 30029 (April 10 2012) (File No 812-13795) (the ldquoExemptive Reliefrdquo) In addition the Commission has issued no-action relief upon which the Trust may rely pertaining to the Fundrsquos ability to invest in derivatives notwithstanding certain representations in the application for the Exemptive Relief See Commission No-Action Letter (December 6 2012)
6 See Post-Effective Amendment No 104 to Registration Statement on Form N-1A for the Trust dated January 29 2015 (File Nos 333-174332 and 811-22559) The descriptions of the Fund and the Shares contained herein are based in part on information in the Registration Statement
7
SR-NASDAQ-2015-011 Amendment No 2 Page 36 of 64
Paragraph (g) of Rule 5735 provides that if the investment adviser to the
investment company issuing Managed Fund Shares is affiliated with a broker-dealer
such investment adviser shall erect a ldquofire wallrdquo between the investment adviser and the
broker-dealer with respect to access to information concerning the composition andor
changes to such investment company portfolio7 In addition paragraph (g) further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio Rule 5735(g) is similar
to Nasdaq Rule 5705(b)(5)(A)(i) however paragraph (g) in connection with the
establishment of a ldquofire wallrdquo between the investment adviser and the broker-dealer
reflects the applicable open-end fundrsquos portfolio not an underlying benchmark index as
is the case with index-based funds The Adviser is not a broker-dealer although it is
affiliated with the Distributor a broker-dealer The Adviser has implemented a fire wall
An investment adviser to an open-end fund is required to be registered under the Investment Advisers Act of 1940 (the ldquoAdvisers Actrdquo) As a result the Adviser and its related personnel are subject to the provisions of Rule 204A-1 under the Advisers Act relating to codes of ethics This Rule requires investment advisers to adopt a code of ethics that reflects the fiduciary nature of the relationship to clients as well as compliance with other applicable securities laws Accordingly procedures designed to prevent the communication and misuse of non-public information by an investment adviser must be consistent with Rule 204A-1 under the Advisers Act In addition Rule 206(4)-7 under the Advisers Act makes it unlawful for an investment adviser to provide investment advice to clients unless such investment adviser has (i) adopted and implemented written policies and procedures reasonably designed to prevent violation by the investment adviser and its supervised persons of the Advisers Act and the Commission rules adopted thereunder (ii) implemented at a minimum an annual review regarding the adequacy of the policies and procedures established pursuant to subparagraph (i) above and the effectiveness of their implementation and (iii) designated an individual (who is a supervised person) responsible for administering the policies and procedures adopted under subparagraph (i) above
8
SR-NASDAQ-2015-011 Amendment No 2 Page 37 of 64
with respect to its broker-dealer affiliate regarding access to information concerning the
composition andor changes to the portfolio In addition personnel who make decisions
on the Fundrsquos portfolio composition will be subject to procedures designed to prevent the
use and dissemination of material non-public information regarding the Fundrsquos portfolio
In the event (a) the Adviser becomes or becomes newly affiliated with a broker-dealer
or (b) any new adviser or sub-adviser is a registered broker-dealer or becomes affiliated
with another broker-dealer it will implement a fire wall with respect to its relevant
personnel andor such broker-dealer affiliate as applicable regarding access to
information concerning the composition andor changes to the portfolio and will be
subject to procedures designed to prevent the use and dissemination of material
non-public information regarding such portfolio The Fund does not currently intend to
use a sub-adviser
First Trust Strategic Floating Rate ETF
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions8 at least 80 of its
The term ldquounder normal market conditionsrdquo as used herein includes but is not limited to the absence of adverse market economic political or other conditions including extreme volatility or trading halts in the fixed income markets or the financial markets generally operational issues causing dissemination of inaccurate market information or force majeure type events such as systems failure natural or man-made disaster act of God armed conflict act of terrorism riot or labor disruption or any similar intervening circumstance For temporary defensive purposes during the initial invest-up period and during periods of high cash inflows or outflows the Fund may depart from its principal investment strategies for example it may hold a higher than normal proportion of its assets in cash During such periods the Fund may not be able to achieve its investment objective The Fund may adopt a defensive strategy when the Adviser believes securities in which the Fund normally invests have elevated risks due to political or economic factors and in other extraordinary circumstances
SR-NASDAQ-2015-011 Amendment No 2 Page 38 of 64
net assets in a portfolio of the following types of floating-rate9 debt instruments issued by
US and non-US public- and private-sector entities floating-rate corporate10 and
government bonds and notes floating-rate agency securities 11 floating-rate instruments
of non-US issuers floating-rate privately-issued securities 12 floating-rate asset-backed
securities 13 floating-rate mortgage-backed securities14 floating-rate loans 15 and
9 For the avoidance of doubt the term ldquofloating-raterdquo shall also include similar terms such as ldquovariable-raterdquo and ldquoadjustable-raterdquo
10 The Adviser expects that under normal market conditions generally for a corporate bond to be considered as an eligible investment after taking into account such an investment at least 75 of the Fundrsquos net assets that are invested in floating-rate corporate bonds and as described below fixed-rate corporate bonds (in the aggregate) will be comprised of corporate bonds that have at the time of original issuance $100 million or more par amount outstanding
11 ldquoAgency securitiesrdquo for these purposes generally includes securities issued by the following entities Government National Mortgage Association (Ginnie Mae) Federal National Mortgage Association (Fannie Mae) Federal Home Loan Banks (FHLBanks) Federal Home Loan Mortgage Corporation (Freddie Mac) Farm Credit System (FCS) Farm Credit Banks (FCBanks) Student Loan Marketing Association (Sallie Mae) Resolution Funding Corporation (REFCORP) Financing Corporation (FICO) and the Farm Credit System (FCS) Financial Assistance Corporation (FAC) Agency securities can include but are not limited to mortgage-backed securities
12 ldquoPrivately-issued securitiesrdquo for these purposes generally includes Rule 144A securities other than mortgage-backed Rule 144A securities Under normal market conditions privately-issued securities will have at the time of original issuance $100 million or more principal amount outstanding to be considered eligible investments
13 Asset-backed securities are securities that are backed by a pool of assets The Fund currently intends to invest in asset-backed securities that are consumer asset-backed securities
14 Mortgage-backed securities which are securities that directly or indirectly represent a participation in or are secured by and payable from mortgage loans on real property will consist of (1) residential mortgage-backed securities (ldquoRMBSrdquo) (2) commercial mortgage-backed securities (ldquoCMBSrdquo) (3) stripped mortgage-backed securities (ldquoSMBSrdquo) which are mortgage-backed securities
SR-NASDAQ-2015-011 Amendment No 2 Page 39 of 64
investment companies16 (including investment companies advised by the Adviser) that
invest primarily in the foregoing types of debt instruments17 (collectively ldquoFloating Rate
Debt Instrumentsrdquo)
where mortgage payments are divided between paying the loanrsquos principal and paying the loanrsquos interest (4) collateralized mortgage obligations (ldquoCMOsrdquo) and real estate mortgage investment conduits (ldquoREMICsrdquo) which are mortgage-backed securities that are divided into multiple classes with each class being entitled to a different share of the principal and interest payments received from the pool of underlying assets
15 The floating-rate loans in which the Fund will invest will represent amounts borrowed by companies or other entities from banks and other lenders and a significant portion of such floating-rate loans may be rated below investment grade or unrated Floating-rate loans held by the Fund may be senior or subordinate obligations of the borrower and may or may not be secured by collateral First lien senior secured floating-rate loans are referred to herein as ldquosenior loansrdquo Floating-rate loans that are not senior loans (ie unsecured floating-rate loans and secured floating-rate loans that are not first lien floating-rate loans) are referred to herein as ldquojunior loansrdquo The Fund will generally invest in floating-rate loans that the Adviser deems to be liquid with readily available prices notwithstanding the foregoing the Fund may invest in floating-rate loans that are deemed illiquid so long as the Fund complies with the 15 limitation on investments of its net assets in illiquid assets described below under ldquoInvestment Restrictionsrdquo
16 The Fund currently anticipates investing only in registered open-end investment companies that are listed and traded in the US on registered exchanges (ie other ETFs) An ETF is an investment company registered under the 1940 Act that holds a portfolio of securities Many ETFs are designed to track the performance of a securities index including industry sector country and region indexes The Fund may invest in the securities of ETFs in excess of the limits imposed under the 1940 Act pursuant to exemptive orders obtained by other ETFs and their sponsors from the Commission In addition the Fund may invest in the securities of certain investment companies in excess of the limits imposed under the 1940 Act pursuant to an exemptive order obtained by the Trust and the Adviser from the Commission See Investment Company Act Release No 30377 (February 5 2013) (File No 812-13895) The ETFs in which the Fund may invest include Index Fund Shares (as described in Nasdaq Rule 5705) Portfolio Depository Receipts (as described in Nasdaq Rule 5705) and Managed Fund Shares (as described in Nasdaq Rule 5735) While the Fund may invest in inverse ETFs the Fund will not invest in leveraged or inverse leveraged (eg 2X or -3X) ETFs
SR-NASDAQ-2015-011 Amendment No 2 Page 40 of 64
At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade To be considered
ldquoinvestment graderdquo under normal market conditions rated Floating Rate Debt
Instruments will carry at the time of purchase a rating in the highest four rating
categories of at least one nationally recognized statistical ratings organization
(ldquoNRSROrdquo) (eg BBB- or higher by Standard amp Poorrsquos Ratings Services (ldquoSampPrdquo)
andor Fitch Ratings (ldquoFitchrdquo) or Baa3 or higher by Moodyrsquos Investors Service Inc
(ldquoMoodyrsquosrdquo)18 For unrated securities to be considered ldquoinvestment graderdquo under normal
market conditions such securities will be determined at the time of purchase to be of
comparable quality19 by the Adviser The Fund may invest up to 35 of its net assets in
securities that are at the time of investment rated below investment grade by each
NRSRO rating such securities (or securities that are unrated and determined by the
17 The liquidity of a security especially in the case of asset-backed and mortgage-backed securities will be a substantial factor in the Fundrsquos security selection process Consistent with the discussion below under ldquoInvestment Restrictionsrdquo the Fund will not purchase any Floating Rate Debt Instruments (including asset-backed securities and mortgage-backed securities) that in the Adviserrsquos opinion are illiquid if as a result more than 15 of the value of the Fundrsquos net assets will be invested in illiquid assets
18 For the avoidance of doubt if a security is rated by multiple NRSROs and receives different ratings the Fund will treat the security as being rated in the highest rating category received from an NRSRO
19 Comparable quality of unrated securities will be determined by the Adviser based on fundamental credit analysis of the unrated security and comparable NRSRO-rated securities On a best efforts basis the Adviser will attempt to make a rating determination based on publicly available data In making a ldquocomparable qualityrdquo determination the Adviser may consider for example whether the issuer of the security has issued other rated securities the nature and provisions of the relevant security whether the obligations under the relevant security are guaranteed by another entity and the rating of such guarantor (if any) relevant cash flows macroeconomic analysis andor sector or industry analysis
SR-NASDAQ-2015-011 Amendment No 2 Page 41 of 64
Adviser to be of comparable quality) commonly referred to as ldquohigh yieldrdquo or ldquojunkrdquo
bonds If subsequent to purchase by the Fund a security held by the Fund experiences a
decline in credit quality and falls below investment grade the Fund may continue to hold
the security and it will not cause the Fund to violate the 35 investment limitation
however the security will be taken into account for purposes of determining whether
purchases of additional securities will cause the Fund to violate such limitation
The Fund will limit its investments in asset-backed securities (excluding agency
mortgage-backed securities) and non-agency mortgage-backed securities (in the
aggregate) to 20 of its net assets20 In addition the Fund will limit its investments in
junior loans to 20 of its net assets
The Fund will hold debt securities (including in the aggregate Floating Rate
Debt Instruments and the fixed-rate debt securities described below) of at least 13
non-affiliated issuers
Other Investments
Under normal market conditions the Fund will invest primarily in the Floating
Rate Debt Instruments described above to meet its investment objective In addition the
Fund may invest up to 20 of its net assets in the following types of fixed-rate debt
securities corporate21 and government bonds and notes agency securities22 instruments
20 For the avoidance of doubt there is no limitation on the Fundrsquos investments in agency mortgage-backed securities
21 See footnote 10 above
22 See footnote 11 above
SR-NASDAQ-2015-011 Amendment No 2 Page 42 of 64
of non-US issuers in developed markets privately-issued securities 23 asset-backed
securities 24 mortgage-backed securities 25 municipal bonds money market securities26
and investment companies27 (including investment companies advised by the Adviser)
that invest primarily in the foregoing types of debt securities
Further to pursue its investment objective the Fund may invest up to 20 of the
value of its net assets in exchange-listed options on US Treasury futures contracts and
exchange-listed US Treasury futures contracts28 The use of these derivative
transactions may allow the Fund to obtain net long or short exposures to selected interest
rates These derivatives may also be used to hedge risks including interest rate risks and
credit risks associated with the Fundrsquos portfolio investments The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
23 See footnote 12 above
24 See footnote 13 above
25 See footnote 14 above
26 ldquoMoney market securitiesrdquo for these purposes generally includes short-term high-quality obligations issued or guaranteed by the US Treasury or the agencies or instrumentalities of the US government short-term high-quality securities issued or guaranteed by non-US governments agencies and instrumentalities repurchase agreements commercial paper (both asset-backed and non-assetshybacked) and deposits and other obligations of US and non-US banks and financial institutions
27 See footnote 16 above
28 At least 90 of the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be invested in instruments that trade in markets that are members of the Intermarket Surveillance Group (ldquoISGrdquo) (see footnote 40 below) or are parties to a comprehensive surveillance sharing agreement with the Exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 43 of 64
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index
Investment Restrictions
The Fund will not invest 25 or more of the value of its total assets in securities
of issuers in any one industry This restriction does not apply to (a) obligations issued or
guaranteed by the US government its agencies or instrumentalities or (b) securities of
other investment companies29
The Fund may hold up to an aggregate amount of 15 of its net assets in illiquid
assets (calculated at the time of investment) including Rule 144A securities deemed
illiquid by the Adviser30 The Fund will monitor its portfolio liquidity on an ongoing
basis to determine whether in light of current circumstances an adequate level of
liquidity is being maintained and will consider taking appropriate steps in order to
maintain adequate liquidity if through a change in values net assets or other
circumstances more than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid
assets include securities subject to contractual or other restrictions on resale and other
29 See Form N-1A Item 9 The Commission has taken the position that a fund is concentrated if it invests more than 25 of the value of its total assets in any one industry See eg Investment Company Act Release No 9011 (October 30 1975) 40 FR 54241 (November 21 1975)
30 In reaching liquidity decisions the Adviser may consider the following factors the frequency of trades and quotes for the security the number of dealers wishing to purchase or sell the security and the number of other potential purchasers dealer undertakings to make a market in the security and the nature of the security and the nature of the marketplace in which it trades (eg the time needed to dispose of the security the method of soliciting offers and the mechanics of transfer)
SR-NASDAQ-2015-011 Amendment No 2 Page 44 of 64
instruments that lack readily available markets as determined in accordance with
Commission staff guidance31
The Fund will not invest in non-US equity securities
Creation and Redemption of Shares
The Fund will issue and redeem Shares on a continuous basis at net asset value
(ldquoNAVrdquo)32 only in large blocks of Shares (ldquoCreation Unitsrdquo) in transactions with
authorized participants generally including broker-dealers and large institutional
investors (ldquoAuthorized Participantsrdquo) Creation Units generally will consist of 50000
Shares although this may change from time to time Creation Units however are not
expected to consist of less than 50000 Shares As described in the Registration
Statement and consistent with the Exemptive Relief the Fund will issue and redeem
Creation Units in exchange for an in-kind portfolio of instruments andor cash in lieu of
31 The Commission has stated that long-standing Commission guidelines have required open-end funds to hold no more than 15 of their net assets in illiquid securities and other illiquid assets See Investment Company Act Release No 28193 (March 11 2008) 73 FR 14618 (March 18 2008) footnote 34 See also Investment Company Act Release No 5847 (October 21 1969) 35 FR 19989 (December 31 1970) (Statement Regarding ldquoRestricted Securitiesrdquo) Investment Company Act Release No 18612 (March 12 1992) 57 FR 9828 (March 20 1992) (Revisions of Guidelines to Form N-1A) A fundrsquos portfolio security is illiquid if it cannot be disposed of in the ordinary course of business within seven days at approximately the value ascribed to it by the fund See Investment Company Act Release No 14983 (March 12 1986) 51 FR 9773 (March 21 1986) (adopting amendments to Rule 2a-7 under the 1940 Act) Investment Company Act Release No 17452 (April 23 1990) 55 FR 17933 (April 30 1990) (adopting Rule 144A under the Securities Act of 1933)
32 The NAV of the Fundrsquos Shares generally will be calculated once daily Monday through Friday as of the close of regular trading on the New York Stock Exchange generally 400 pm Eastern Time (the ldquoNAV Calculation Timerdquo) NAV per Share will be calculated by dividing the Fundrsquos net assets by the number of Fund Shares outstanding For more information regarding the valuation of Fund investments in calculating the Fundrsquos NAV see the Registration Statement
SR-NASDAQ-2015-011 Amendment No 2 Page 45 of 64
such instruments (the ldquoCreation Basketrdquo) In addition if there is a difference between the
NAV attributable to a Creation Unit and the market value of the Creation Basket
exchanged for the Creation Unit the party conveying instruments with the lower value
will pay to the other an amount in cash equal to the difference (referred to as the ldquoCash
Componentrdquo)
Creations and redemptions must be made by or through an Authorized Participant
that has executed an agreement that has been agreed to by the Distributor and BNY with
respect to creations and redemptions of Creation Units All standard orders to create
Creation Units must be received by the transfer agent no later than the closing time of the
regular trading session on the New York Stock Exchange (ordinarily 400 pm Eastern
Time) (the ldquoClosing Timerdquo) in each case on the date such order is placed in order for the
creation of Creation Units to be effected based on the NAV of Shares as next determined
on such date after receipt of the order in proper form Shares may be redeemed only in
Creation Units at their NAV next determined after receipt not later than the Closing Time
of a redemption request in proper form by the Fund through the transfer agent and only
on a business day
The Fundrsquos custodian through the National Securities Clearing Corporation will
make available on each business day prior to the opening of business of the Exchange
the list of the names and quantities of the instruments comprising the Creation Basket as
well as the estimated Cash Component (if any) for that day The published Creation
Basket will apply until a new Creation Basket is announced on the following business
day prior to commencement of trading in the Shares
SR-NASDAQ-2015-011 Amendment No 2 Page 46 of 64
Net Asset Value
The Fundrsquos NAV will be determined as of the close of trading (normally
400 pm Eastern Time) on each day the New York Stock Exchange is open for
business NAV will be calculated for the Fund by taking the market price of the Fundrsquos
total assets including interest or dividends accrued but not yet collected less all
liabilities and dividing such amount by the total number of Shares outstanding The
result rounded to the nearest cent will be the NAV per Share All valuations will be
subject to review by the Board of Trustees of the Trust (ldquoTrust Boardrdquo) or its delegate
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with valuation procedures (which may be revised from time to time) adopted by the Trust
Board (the ldquoValuation Proceduresrdquo) and in accordance with the 1940 Act A market
valuation generally means a valuation (i) obtained from an exchange an independent
pricing service (ldquoPricing Servicerdquo) or a major market maker (or dealer) or (ii) based on a
price quotation or other equivalent indication of value supplied by an exchange a Pricing
Service or a major market maker (or dealer) The information summarized below is
based on the Valuation Procedures as currently in effect however as noted above the
Valuation Procedures are amended from time to time and therefore such information is
subject to change
Certain securities including Floating Rate Debt Instruments in which the Fund
may invest will not be listed on any securities exchange or board of trade Such
securities will typically be bought and sold by institutional investors in individually
negotiated private transactions that function in many respects like an over-the-counter
SR-NASDAQ-2015-011 Amendment No 2 Page 47 of 64
secondary market although typically no formal market makers will exist Certain
securities particularly debt securities will have few or no trades or trade infrequently
and information regarding a specific security may not be widely available or may be
incomplete Accordingly determinations of the fair value of debt securities may be
based on infrequent and dated information Because there is less reliable objective data
available elements of judgment may play a greater role in valuation of debt securities
than for other types of securities Typically Floating Rate Debt Instruments and other
debt securities in which the Fund may invest (other than those described below) will be
valued using information provided by a Pricing Service Debt securities having a
remaining maturity of 60 days or less when purchased will be valued at cost adjusted for
amortization of premiums and accretion of discounts provided the Adviserrsquos pricing
committee (the ldquoPricing Committeerdquo) has determined that the use of amortized cost is an
appropriate reflection of fair value given market and issuer-specific conditions existing at
the time of the determination Overnight repurchase agreements will be valued at cost
and term repurchase agreements (ie those whose maturity exceeds seven days) will be
valued at the average of the bid quotations obtained daily from at least two recognized
dealers
Asset-backed and mortgage-backed securities will generally be valued by using a
Pricing Service If a Pricing Service does not cover a particular asset-backed or
mortgage-backed security or discontinues covering a particular asset-backed or
mortgage-backed security the security will be priced using broker quotes generally
provided by brokers that make or participate in markets in the security To derive values
Pricing Services and broker-dealers may use matrix pricing and valuation models as well
SR-NASDAQ-2015-011 Amendment No 2 Page 48 of 64
as recent market transactions for the same or similar assets As it deems appropriate the
Pricing Committee may determine that a Pricing Service price does not represent an
accurate value of an asset-backed or mortgage-backed security based on broker quotes it
receives a recent trade in the security by the Fund information from a portfolio manager
or other market information In the event that the Pricing Committee determines that the
Pricing Service price is unreliable or inaccurate based on such other information broker
quotes may be used Additionally if the Pricing Committee determines that the price of
an asset-backed or mortgage-backed security obtained from a Pricing Service and
available broker quotes is unreliable or inaccurate due to market conditions or other
reasons or if a Pricing Service price or broker quote is unavailable the security will be
valued using fair value pricing as described below
Equity securities listed on any exchange other than the Exchange will be valued at
the last sale price on the exchange on which they are principally traded on the business
day as of which such value is being determined Equity securities listed on the Exchange
will be valued at the official closing price on the business day as of which such value is
being determined If there has been no sale on such day or no official closing price in
the case of securities traded on the Exchange the securities will be valued using fair
value pricing as described below Equity securities traded on more than one securities
exchange will be valued at the last sale price or official closing price as applicable on
the business day as of which such value is being determined at the close of the exchange
representing the principal market for such securities
Exchange-traded options and futures contracts will be valued at the closing price
in the market where such contracts are principally traded
SR-NASDAQ-2015-011 Amendment No 2 Page 49 of 64
Certain securities including Floating Rate Debt Instruments in which the Fund
will invest will not be able to be priced by pre-established pricing methods Such
securities may be valued by the Trust Board or its delegate at fair value The use of fair
value pricing by the Fund will be governed by the Valuation Procedures and conducted in
accordance with the provisions of the 1940 Act Valuing the Fundrsquos securities using fair
value pricing will result in using prices for those securities that may differ from current
market valuations or official closing prices on the applicable exchange
Availability of Information
The Fundrsquos website (wwwftportfolioscom) which will be publicly available
prior to the public offering of Shares will include a form of the prospectus for the Fund
that may be downloaded The website will include the Sharesrsquo ticker CUSIP and
exchange information along with additional quantitative information updated on a daily
basis including for the Fund (1) daily trading volume the prior business dayrsquos reported
NAV and closing price mid-point of the bidask spread at the time of calculation of such
NAV (the ldquoBidAsk Pricerdquo)33 and a calculation of the premium and discount of the
BidAsk Price against the NAV and (2) data in chart format displaying the frequency
distribution of discounts and premiums of the daily BidAsk Price against the NAV
within appropriate ranges for each of the four previous calendar quarters On each
business day before commencement of trading in Shares in the Regular Market Session34
33 The BidAsk Price of the Fund will be determined using the mid-point of the highest bid and the lowest offer on the Exchange as of the time of calculation of the Fundrsquos NAV The records relating to BidAsk Prices will be retained by the Fund and its service providers
34 See Nasdaq Rule 4120(b)(4) (describing the three trading sessions on the Exchange (1) Pre-Market Session from 4 am to 930 am Eastern Time (2)
SR-NASDAQ-2015-011 Amendment No 2 Page 50 of 64
on the Exchange the Fund will disclose on its website the identities and quantities of the
portfolio of securities and other assets (the ldquoDisclosed Portfoliordquo as defined in Nasdaq
Rule 5735(c)(2)) held by the Fund that will form the basis for the Fundrsquos calculation of
NAV at the end of the business day 35 The Fundrsquos disclosure of derivative positions in
the Disclosed Portfolio will include information that market participants can use to value
these positions intraday On a daily basis the Fund will disclose on the Fundrsquos website
the following information regarding each portfolio holding as applicable to the type of
holding ticker symbol CUSIP number or other identifier if any a description of the
holding (including the type of holding) the identity of the security or other asset or
instrument underlying the holding if any for options the option strike price quantity
held (as measured by for example par value notional value or number of shares
contracts or units) maturity date if any coupon rate if any effective date if any market
value of the holding and percentage weighting of the holding in the Fundrsquos portfolio
The website information will be publicly available at no charge
In addition for the Fund an estimated value defined in Rule 5735(c)(3) as the
ldquoIntraday Indicative Valuerdquo that reflects an estimated intraday value of the Fundrsquos
Disclosed Portfolio will be disseminated Moreover the Intraday Indicative Value
Regular Market Session from 930 am to 4 pm or 415 pm Eastern Time and (3) Post-Market Session from 4 pm or 415 pm to 8 pm Eastern Time)
Under accounting procedures to be followed by the Fund trades made on the prior business day (ldquoTrdquo) will be booked and reflected in NAV on the current business day (ldquoT+1rdquo) Accordingly the Fund will be able to disclose at the beginning of the business day the portfolio that will form the basis for the NAV calculation at the end of the business day
35
SR-NASDAQ-2015-011 Amendment No 2 Page 51 of 64
available on the NASDAQ OMX Information LLC proprietary index data service36 will
be based upon the current value for the components of the Disclosed Portfolio and will be
updated and widely disseminated by one or more major market data vendors and broadly
displayed at least every 15 seconds during the Regular Market Session The Intraday
Indicative Value will be based on quotes and closing prices from the securitiesrsquo local
market and may not reflect events that occur subsequent to the local marketrsquos close
Premiums and discounts between the Intraday Indicative Value and the market price may
occur This should not be viewed as a ldquoreal timerdquo update of the NAV per Share of the
Fund which is calculated only once a day
The dissemination of the Intraday Indicative Value together with the Disclosed
Portfolio will allow investors to determine the value of the underlying portfolio of the
Fund on a daily basis and will provide a close estimate of that value throughout the
trading day
Investors will also be able to obtain the Fundrsquos Statement of Additional
Information (ldquoSAIrdquo) the Fundrsquos annual and semi-annual reports (together ldquoShareholder
Reportsrdquo) and its Form N-CSR and Form N-SAR filed twice a year The Fundrsquos SAI
and Shareholder Reports will be available free upon request from the Fund and those
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or
downloaded from the Commissionrsquos website at wwwsecgov Information regarding
Currently the NASDAQ OMX Global Index Data Service (ldquoGIDSrdquo) is the NASDAQ OMX global index data feed service offering real-time updates daily summary messages and access to widely followed indexes and Intraday Indicative Values for ETFs GIDS provides investment professionals with the daily information needed to track or trade NASDAQ OMX indexes listed ETFs or third-party partner indexes and ETFs
36
SR-NASDAQ-2015-011 Amendment No 2 Page 52 of 64
market price and trading volume of the Shares will be continually available on a real-time
basis throughout the day on brokersrsquo computer screens and other electronic services
Information regarding the previous dayrsquos closing price and trading volume information
for the Shares will be published daily in the financial section of newspapers Quotation
and last sale information for the Shares will be available via Nasdaq proprietary quote
and trade services as well as in accordance with the Unlisted Trading Privileges and the
Consolidated Tape Association (ldquoCTArdquo) plans for the Shares Quotation and last sale
information for the other ETFs in which the Fund will invest will be available via the
quote and trade services of their respective primary exchanges as well as in accordance
with the Unlisted Trading Privileges and the CTA plans as applicable Quotation and
last sale information for US exchange-traded options will be available via the Options
Price Reporting Authority Intraday executable price quotations on Floating Rate Debt
Instruments and other assets not traded on an exchange will be available from major
broker-dealer firms or market data vendors as well as from automated quotation systems
published or other public sources or online information services Additionally the Trade
Reporting and Compliance Engine (ldquoTRACErdquo) of the Financial Industry Regulatory
Authority (ldquoFINRArdquo) will be a source of price information for corporate bonds
privately-issued securities mortgage-backed securities and asset-backed securities to the
extent transactions in such securities are reported to TRACE37 For exchange-traded
Broker-dealers that are FINRA member firms have an obligation to report transactions in specified debt securities to TRACE to the extent required under applicable FINRA rules Generally such debt securities will have at issuance a maturity that exceeds one calendar year
37
SR-NASDAQ-2015-011 Amendment No 2 Page 53 of 64
assets intraday pricing information will be available directly from the applicable listing
exchange
Additional information regarding the Fund and the Shares including investment
strategies risks creation and redemption procedures fees Fund holdings disclosure
policies distributions and taxes will be included in the Registration Statement
Initial and Continued Listing
The Shares will be subject to Rule 5735 which sets forth the initial and continued
listing criteria applicable to Managed Fund Shares The Exchange represents that for
initial andor continued listing the Fund must be in compliance with Rule 10A-338 under
the Act A minimum of 100000 Shares will be outstanding at the commencement of
trading on the Exchange The Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the NAV and the
Disclosed Portfolio will be made available to all market participants at the same time
Trading Halts
With respect to trading halts the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading in the Shares of the Fund Nasdaq will
halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12) Trading may be
halted because of market conditions or for reasons that in the view of the Exchange
make trading in the Shares inadvisable These may include (1) the extent to which
trading is not occurring in the securities andor the other assets constituting the Disclosed
Portfolio of the Fund or (2) whether other unusual conditions or circumstances
See 17 CFR 24010A-3 38
SR-NASDAQ-2015-011 Amendment No 2 Page 54 of 64
detrimental to the maintenance of a fair and orderly market are present Trading in the
Shares also will be subject to Rule 5735(d)(2)(D) which sets forth circumstances under
which Shares of the Fund may be halted
Trading Rules
Nasdaq deems the Shares to be equity securities thus rendering trading in the
Shares subject to Nasdaqrsquos existing rules governing the trading of equity securities
Nasdaq will allow trading in the Shares from 400 am until 800 pm Eastern Time
The Exchange has appropriate rules to facilitate transactions in the Shares during all
trading sessions As provided in Nasdaq Rule 5735(b)(3) the minimum price variation
for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $001
Surveillance
The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws39 The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities laws
The surveillances referred to above generally focus on detecting securities trading
outside their normal patterns which could be indicative of manipulative or other violative
activity When such situations are detected surveillance analysis follows and
FINRA surveils trading on the Exchange pursuant to a regulatory services agreement The Exchange is responsible for FINRArsquos performance under this regulatory services agreement
39
SR-NASDAQ-2015-011 Amendment No 2 Page 55 of 64
investigations are opened where appropriate to review the behavior of all relevant
parties for all relevant trading violations
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 56 of 64
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
SR-NASDAQ-2015-011 Amendment No 2 Page 57 of 64
2 Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
SR-NASDAQ-2015-011 Amendment No 2 Page 58 of 64
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
SR-NASDAQ-2015-011 Amendment No 2 Page 59 of 64
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
SR-NASDAQ-2015-011 Amendment No 2 Page 60 of 64
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 61 of 64
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
SR-NASDAQ-2015-011 Amendment No 2 Page 62 of 64
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
B Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
C Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received From Members Participants or Others
Written comments were neither solicited nor received
III Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Within 45 days of the date of publication of this notice in the Federal Register or
within such longer period (i) as the Commission may designate up to 90 days of such date
if it finds such longer period to be appropriate and publishes its reasons for so finding or
(ii) as to which the Exchange consents the Commission shall (a) by order approve or
disapprove such proposed rule change or (b) institute proceedings to determine whether
the proposed rule change should be disapproved
SR-NASDAQ-2015-011 Amendment No 2 Page 63 of 64
IV Solicitation of Comments
Interested persons are invited to submit written data views and arguments
concerning the foregoing including whether the proposed rule change is consistent with
the Act Comments may be submitted by any of the following methods
Electronic comments
bull Use the Commissionrsquos Internet comment form
(httpwwwsecgovrulessroshtml) or
bull Send an e-mail to rule-commentssecgov Please include File Number
SR-NASDAQ-2015-011 on the subject line
Paper comments
bull Send paper comments in triplicate to Brent J Fields Secretary Securities and
Exchange Commission Station Place 100 F Street NE Washington DC
20549-9303
All submissions should refer to File Number SR-NASDAQ-2015-011 This file number
should be included on the subject line if e-mail is used To help the Commission process
and review your comments more efficiently please use only one method The
Commission will post all comments on the Commissionrsquos Internet website
httpwwwsecgovrulessroshtml
Copies of the submission all subsequent amendments all written statements with
respect to the proposed rule change that are filed with the Commission and all written
communications relating to the proposed rule change between the Commission and any
person other than those that may be withheld from the public in accordance with the
provisions of 5 USC 552 will be available for website viewing and printing in the
Commissionrsquos Public Reference Room 100 F Street NE Washington DC 20549 on
SR-NASDAQ-2015-011 Amendment No 2 Page 64 of 64
official business days between the hours of 1000 am and 300 pm Copies of the filing
also will be available for inspection and copying at the principal office of Nasdaq All
comments received will be posted without change the Commission does not edit
personal identifying information from submissions You should submit only information
that you wish to make available publicly
All submissions should refer to File Number SR-NASDAQ-2015-011 and should
be submitted on or before [insert date 21 days from publication in the Federal Register]
For the Commission by the Division of Trading and Markets pursuant to
delegated authority41
Kevin M OrsquoNeill Deputy Secretary
17 CFR 20030-3(a)(12) 41
SR-NASDAQ-2015-011 Amendment No 2 Page 17 of 64
as recent market transactions for the same or similar assets As it deems appropriate the
Pricing Committee may determine that a Pricing Service price does not represent an
accurate value of an asset-backed or mortgage-backed security based on broker quotes it
receives a recent trade in the security by the Fund information from a portfolio manager
or other market information In the event that the Pricing Committee determines that the
Pricing Service price is unreliable or inaccurate based on such other information broker
quotes may be used Additionally if the Pricing Committee determines that the price of
an asset-backed or mortgage-backed security obtained from a Pricing Service and
available broker quotes is unreliable or inaccurate due to market conditions or other
reasons or if a Pricing Service price or broker quote is unavailable the security will be
valued using fair value pricing as described below
Equity securities listed on any exchange other than the Exchange will be valued at
the last sale price on the exchange on which they are principally traded on the business
day as of which such value is being determined Equity securities listed on the Exchange
will be valued at the official closing price on the business day as of which such value is
being determined If there has been no sale on such day or no official closing price in
the case of securities traded on the Exchange the securities will be valued using fair
value pricing as described below Equity securities traded on more than one securities
exchange will be valued at the last sale price or official closing price as applicable on
the business day as of which such value is being determined at the close of the exchange
representing the principal market for such securities
Exchange-traded options and futures contracts will be valued at the closing price
in the market where such contracts are principally traded
SR-NASDAQ-2015-011 Amendment No 2 Page 18 of 64
Certain securities including Floating Rate Debt Instruments in which the Fund
will invest will not be able to be priced by pre-established pricing methods Such
securities may be valued by the Trust Board or its delegate at fair value The use of fair
value pricing by the Fund will be governed by the Valuation Procedures and conducted in
accordance with the provisions of the 1940 Act Valuing the Fundrsquos securities using fair
value pricing will result in using prices for those securities that may differ from current
market valuations or official closing prices on the applicable exchange
Availability of Information
The Fundrsquos website (wwwftportfolioscom) which will be publicly available
prior to the public offering of Shares will include a form of the prospectus for the Fund
that may be downloaded The website will include the Sharesrsquo ticker CUSIP and
exchange information along with additional quantitative information updated on a daily
basis including for the Fund (1) daily trading volume the prior business dayrsquos reported
NAV and closing price mid-point of the bidask spread at the time of calculation of such
NAV (the ldquoBidAsk Pricerdquo)33 and a calculation of the premium and discount of the
BidAsk Price against the NAV and (2) data in chart format displaying the frequency
distribution of discounts and premiums of the daily BidAsk Price against the NAV
within appropriate ranges for each of the four previous calendar quarters On each
business day before commencement of trading in Shares in the Regular Market Session34
33 The BidAsk Price of the Fund will be determined using the mid-point of the highest bid and the lowest offer on the Exchange as of the time of calculation of the Fundrsquos NAV The records relating to BidAsk Prices will be retained by the Fund and its service providers
34 See Nasdaq Rule 4120(b)(4) (describing the three trading sessions on the Exchange (1) Pre-Market Session from 4 am to 930 am Eastern Time (2)
SR-NASDAQ-2015-011 Amendment No 2 Page 19 of 64
on the Exchange the Fund will disclose on its website the identities and quantities of the
portfolio of securities and other assets (the ldquoDisclosed Portfoliordquo as defined in Nasdaq
Rule 5735(c)(2)) held by the Fund that will form the basis for the Fundrsquos calculation of
NAV at the end of the business day 35 The Fundrsquos disclosure of derivative positions in
the Disclosed Portfolio will include information that market participants can use to value
these positions intraday On a daily basis the Fund will disclose on the Fundrsquos website
the following information regarding each portfolio holding as applicable to the type of
holding ticker symbol CUSIP number or other identifier if any a description of the
holding (including the type of holding) the identity of the security or other asset or
instrument underlying the holding if any for options the option strike price quantity
held (as measured by for example par value notional value or number of shares
contracts or units) maturity date if any coupon rate if any effective date if any market
value of the holding and percentage weighting of the holding in the Fundrsquos portfolio
The website information will be publicly available at no charge
In addition for the Fund an estimated value defined in Rule 5735(c)(3) as the
ldquoIntraday Indicative Valuerdquo that reflects an estimated intraday value of the Fundrsquos
Disclosed Portfolio will be disseminated Moreover the Intraday Indicative Value
Regular Market Session from 930 am to 4 pm or 415 pm Eastern Time and (3) Post-Market Session from 4 pm or 415 pm to 8 pm Eastern Time)
Under accounting procedures to be followed by the Fund trades made on the prior business day (ldquoTrdquo) will be booked and reflected in NAV on the current business day (ldquoT+1rdquo) Accordingly the Fund will be able to disclose at the beginning of the business day the portfolio that will form the basis for the NAV calculation at the end of the business day
35
SR-NASDAQ-2015-011 Amendment No 2 Page 20 of 64
available on the NASDAQ OMX Information LLC proprietary index data service36 will
be based upon the current value for the components of the Disclosed Portfolio and will be
updated and widely disseminated by one or more major market data vendors and broadly
displayed at least every 15 seconds during the Regular Market Session The Intraday
Indicative Value will be based on quotes and closing prices from the securitiesrsquo local
market and may not reflect events that occur subsequent to the local marketrsquos close
Premiums and discounts between the Intraday Indicative Value and the market price may
occur This should not be viewed as a ldquoreal timerdquo update of the NAV per Share of the
Fund which is calculated only once a day
The dissemination of the Intraday Indicative Value together with the Disclosed
Portfolio will allow investors to determine the value of the underlying portfolio of the
Fund on a daily basis and will provide a close estimate of that value throughout the
trading day
Investors will also be able to obtain the Fundrsquos Statement of Additional
Information (ldquoSAIrdquo) the Fundrsquos annual and semi-annual reports (together ldquoShareholder
Reportsrdquo) and its Form N-CSR and Form N-SAR filed twice a year The Fundrsquos SAI
and Shareholder Reports will be available free upon request from the Fund and those
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or
downloaded from the Commissionrsquos website at wwwsecgov Information regarding
market price and trading volume of the Shares will be continually available on a real-time
Currently the NASDAQ OMX Global Index Data Service (ldquoGIDSrdquo) is the NASDAQ OMX global index data feed service offering real-time updates daily summary messages and access to widely followed indexes and Intraday Indicative Values for ETFs GIDS provides investment professionals with the daily information needed to track or trade NASDAQ OMX indexes listed ETFs or third-party partner indexes and ETFs
36
SR-NASDAQ-2015-011 Amendment No 2 Page 21 of 64
basis throughout the day on brokersrsquo computer screens and other electronic services
Information regarding the previous dayrsquos closing price and trading volume information
for the Shares will be published daily in the financial section of newspapers Quotation
and last sale information for the Shares will be available via Nasdaq proprietary quote
and trade services as well as in accordance with the Unlisted Trading Privileges and the
Consolidated Tape Association (ldquoCTArdquo) plans for the Shares Quotation and last sale
information for the other ETFs in which the Fund will invest will be available via the
quote and trade services of their respective primary exchanges as well as in accordance
with the Unlisted Trading Privileges and the CTA plans as applicable Quotation and
last sale information for US exchange-traded options will be available via the Options
Price Reporting Authority Intraday executable price quotations on Floating Rate Debt
Instruments and other assets not traded on an exchange will be available from major
broker-dealer firms or market data vendors as well as from automated quotation systems
published or other public sources or online information services Additionally the Trade
Reporting and Compliance Engine (ldquoTRACErdquo) of the Financial Industry Regulatory
Authority (ldquoFINRArdquo) will be a source of price information for corporate bonds
privately-issued securities mortgage-backed securities and asset-backed securities to the
extent transactions in such securities are reported to TRACE37 For exchange-traded
assets intraday pricing information will be available directly from the applicable listing
exchange
Broker-dealers that are FINRA member firms have an obligation to report transactions in specified debt securities to TRACE to the extent required under applicable FINRA rules Generally such debt securities will have at issuance a maturity that exceeds one calendar year
37
SR-NASDAQ-2015-011 Amendment No 2 Page 22 of 64
Additional information regarding the Fund and the Shares including investment
strategies risks creation and redemption procedures fees Fund holdings disclosure
policies distributions and taxes will be included in the Registration Statement
Initial and Continued Listing
The Shares will be subject to Rule 5735 which sets forth the initial and continued
listing criteria applicable to Managed Fund Shares The Exchange represents that for
initial andor continued listing the Fund must be in compliance with Rule 10A-338 under
the Act A minimum of 100000 Shares will be outstanding at the commencement of
trading on the Exchange The Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the NAV and the
Disclosed Portfolio will be made available to all market participants at the same time
Trading Halts
With respect to trading halts the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading in the Shares of the Fund Nasdaq will
halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12) Trading may be
halted because of market conditions or for reasons that in the view of the Exchange
make trading in the Shares inadvisable These may include (1) the extent to which
trading is not occurring in the securities andor the other assets constituting the Disclosed
Portfolio of the Fund or (2) whether other unusual conditions or circumstances
detrimental to the maintenance of a fair and orderly market are present Trading in the
See 17 CFR 24010A-3 38
SR-NASDAQ-2015-011 Amendment No 2 Page 23 of 64
Shares also will be subject to Rule 5735(d)(2)(D) which sets forth circumstances under
which Shares of the Fund may be halted
Trading Rules
Nasdaq deems the Shares to be equity securities thus rendering trading in the
Shares subject to Nasdaqrsquos existing rules governing the trading of equity securities
Nasdaq will allow trading in the Shares from 400 am until 800 pm Eastern Time
The Exchange has appropriate rules to facilitate transactions in the Shares during all
trading sessions As provided in Nasdaq Rule 5735(b)(3) the minimum price variation
for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $001
Surveillance
The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws39 The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities laws
The surveillances referred to above generally focus on detecting securities trading
outside their normal patterns which could be indicative of manipulative or other violative
activity When such situations are detected surveillance analysis follows and
investigations are opened where appropriate to review the behavior of all relevant
parties for all relevant trading violations
FINRA surveils trading on the Exchange pursuant to a regulatory services agreement The Exchange is responsible for FINRArsquos performance under this regulatory services agreement
39
SR-NASDAQ-2015-011 Amendment No 2 Page 24 of 64
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 25 of 64
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
b Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
SR-NASDAQ-2015-011 Amendment No 2 Page 26 of 64
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
SR-NASDAQ-2015-011 Amendment No 2 Page 27 of 64
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
SR-NASDAQ-2015-011 Amendment No 2 Page 28 of 64
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
SR-NASDAQ-2015-011 Amendment No 2 Page 29 of 64
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
SR-NASDAQ-2015-011 Amendment No 2 Page 30 of 64
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
SR-NASDAQ-2015-011 Amendment No 2 Page 31 of 64
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
4 Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
5 Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received from Members Participants or Others
Written comments were neither solicited nor received
6 Extension of Time Period for Commission Action
The Exchange does not consent at this time to an extension of any time period for
Commission action
7 Basis for Summary Effectiveness Pursuant to Section 19(b)(3) or for Accelerated Effectiveness Pursuant to Section 19(b)(2)
Not applicable
8 Proposed Rule Change Based on Rules of Another Self-Regulatory Organization or of the Commission
Not applicable
9 Security-Based Swap Submissions Filed Pursuant to Section 3C of the Act
Not applicable
SR-NASDAQ-2015-011 Amendment No 2 Page 32 of 64
10 Advance Notices Filed Pursuant to Section 806(e) of the Payment Clearing and Settlement Supervision Act
Not applicable
11 Exhibits
1 Completed notice of proposed rule change for publication in the Federal
Register
SR-NASDAQ-2015-011 Amendment No 2 Page 33 of 64
EXHIBIT 1
SECURITIES AND EXCHANGE COMMISSION (Release No 34shy File No SR-NASDAQ-2015-011)
April __ 2015
Self-Regulatory Organizations The NASDAQ Stock Market LLC Notice of Filing of Proposed Rule Change Relating to the Listing and Trading of the Shares of the First Trust Strategic Floating Rate ETF of First Trust Exchange-Traded Fund IV
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (ldquoActrdquo)1 and
Rule 19b-4 thereunder2 notice is hereby given that on February 12 2015 The NASDAQ
Stock Market LLC (ldquoNasdaqrdquo or the ldquoExchangerdquo) filed with the Securities and Exchange
Commission (ldquoCommissionrdquo) the proposed rule change as described in in Items I II and
III below which Items have been prepared by Nasdaq On April 6 2015 Nasdaq filed
Amendment No 1 which replaced the text of the original filing in its entirety On April
15 2015 Nasdaq filed Amendment No 2 which replaced the text of the original filing in
its entirety The Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons
I Self-Regulatory Organizationrsquos Statement of the Terms of Substance of the Proposed Rule Change
Nasdaq proposes to list and trade the shares of the First Trust Strategic Floating
Rate ETF (the ldquoFundrdquo) of the First Trust Strategic Floating Rate ETF (the ldquoFundrdquo) of
First Trust Exchange-Traded Fund IV (the ldquoTrustrdquo) under Nasdaq Rule 5735 (ldquoManaged
1 15 USC 78s(b)(1)
2 17 CFR 24019b-4
SR-NASDAQ-2015-011 Amendment No 2 Page 34 of 64
Fund Sharesrdquo)3 The shares of the Fund are collectively referred to herein as the
ldquoSharesrdquo
The text of the proposed rule change is available at
httpnasdaqcchwallstreetcom at Nasdaqrsquos principal office and at the Commissionrsquos
Public Reference Room
II Self-Regulatory Organizationrsquos Statement of the Purpose of and Statutory Basis for the Proposed Rule Change
In its filing with the Commission Nasdaq included statements concerning the
purpose of and basis for the proposed rule change The text of these statements may be
examined at the places specified in Item IV below Nasdaq has prepared summaries set
forth in Sections A B and C below of the most significant aspects of such statements
A Self-Regulatory Organizationrsquos Statement of the Purpose of and Statutory Basis for the Proposed Rule Change
1 Purpose
The Exchange proposes to list and trade the Shares of the Fund under Nasdaq
Rule 5735 which governs the listing and trading of Managed Fund Shares4 on the
3 The Commission approved Nasdaq Rule 5735 in Securities Exchange Act Release No 57962 (June 13 2008) 73 FR 35175 (June 20 2008) (SR-NASDAQ-2008shy039) There are already multiple actively-managed funds listed on the Exchange see eg Securities Exchange Act Release Nos 69464 (April 26 2013) 78 FR 25774 (May 2 2013) (SR-NASDAQ-2013-036) (order approving listing and trading of First Trust Senior Loan Fund) 68972 (February 22 2013) 78 FR 13721 (February 28 2013) (SR-NASDAQ-2012-147) (order approving listing and trading of First Trust High Yield LongShort ETF) 66489 (February 29 2012) 77 FR 13379 (March 6 2012) (SR-NASDAQ-2012-004) (order approving listing and trading of WisdomTree Emerging Markets Corporate Bond Fund) The Exchange believes the proposed rule change raises no significant issues not previously addressed in those prior Commission orders
4 A Managed Fund Share is a security that represents an interest in an investment company registered under the Investment Company Act of 1940 (15 USC 80ashy
SR-NASDAQ-2015-011 Amendment No 2 Page 35 of 64
Exchange The Fund will be an actively-managed exchange-traded fund (ldquoETFrdquo) The
Shares will be offered by the Trust which was established as a Massachusetts business
trust on September 15 20105 The Trust is registered with the Commission as an
investment company and has filed a registration statement on Form N-1A (ldquoRegistration
Statementrdquo) with the Commission6 The Fund will be a series of the Trust The Fund
intends to qualify each year as a regulated investment company (ldquoRICrdquo) under
Subchapter M of the Internal Revenue Code of 1986 as amended
First Trust Advisors LP will be the investment adviser (ldquoAdviserrdquo) to the Fund
First Trust Portfolios LP (the ldquoDistributorrdquo) will be the principal underwriter and
distributor of the Fundrsquos Shares The Bank of New York Mellon Corporation (ldquoBNYrdquo)
will act as the administrator accounting agent custodian and transfer agent to the Fund
1) (the ldquo1940 Actrdquo) organized as an open-end investment company or similar entity that invests in a portfolio of securities selected by its investment adviser consistent with its investment objectives and policies In contrast an open-end investment company that issues Index Fund Shares listed and traded on the Exchange under Nasdaq Rule 5705 seeks to provide investment results that correspond generally to the price and yield performance of a specific foreign or domestic stock index fixed income securities index or combination thereof
5 The Commission has issued an order upon which the Trust may rely granting certain exemptive relief under the 1940 Act See Investment Company Act Release No 30029 (April 10 2012) (File No 812-13795) (the ldquoExemptive Reliefrdquo) In addition the Commission has issued no-action relief upon which the Trust may rely pertaining to the Fundrsquos ability to invest in derivatives notwithstanding certain representations in the application for the Exemptive Relief See Commission No-Action Letter (December 6 2012)
6 See Post-Effective Amendment No 104 to Registration Statement on Form N-1A for the Trust dated January 29 2015 (File Nos 333-174332 and 811-22559) The descriptions of the Fund and the Shares contained herein are based in part on information in the Registration Statement
7
SR-NASDAQ-2015-011 Amendment No 2 Page 36 of 64
Paragraph (g) of Rule 5735 provides that if the investment adviser to the
investment company issuing Managed Fund Shares is affiliated with a broker-dealer
such investment adviser shall erect a ldquofire wallrdquo between the investment adviser and the
broker-dealer with respect to access to information concerning the composition andor
changes to such investment company portfolio7 In addition paragraph (g) further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio Rule 5735(g) is similar
to Nasdaq Rule 5705(b)(5)(A)(i) however paragraph (g) in connection with the
establishment of a ldquofire wallrdquo between the investment adviser and the broker-dealer
reflects the applicable open-end fundrsquos portfolio not an underlying benchmark index as
is the case with index-based funds The Adviser is not a broker-dealer although it is
affiliated with the Distributor a broker-dealer The Adviser has implemented a fire wall
An investment adviser to an open-end fund is required to be registered under the Investment Advisers Act of 1940 (the ldquoAdvisers Actrdquo) As a result the Adviser and its related personnel are subject to the provisions of Rule 204A-1 under the Advisers Act relating to codes of ethics This Rule requires investment advisers to adopt a code of ethics that reflects the fiduciary nature of the relationship to clients as well as compliance with other applicable securities laws Accordingly procedures designed to prevent the communication and misuse of non-public information by an investment adviser must be consistent with Rule 204A-1 under the Advisers Act In addition Rule 206(4)-7 under the Advisers Act makes it unlawful for an investment adviser to provide investment advice to clients unless such investment adviser has (i) adopted and implemented written policies and procedures reasonably designed to prevent violation by the investment adviser and its supervised persons of the Advisers Act and the Commission rules adopted thereunder (ii) implemented at a minimum an annual review regarding the adequacy of the policies and procedures established pursuant to subparagraph (i) above and the effectiveness of their implementation and (iii) designated an individual (who is a supervised person) responsible for administering the policies and procedures adopted under subparagraph (i) above
8
SR-NASDAQ-2015-011 Amendment No 2 Page 37 of 64
with respect to its broker-dealer affiliate regarding access to information concerning the
composition andor changes to the portfolio In addition personnel who make decisions
on the Fundrsquos portfolio composition will be subject to procedures designed to prevent the
use and dissemination of material non-public information regarding the Fundrsquos portfolio
In the event (a) the Adviser becomes or becomes newly affiliated with a broker-dealer
or (b) any new adviser or sub-adviser is a registered broker-dealer or becomes affiliated
with another broker-dealer it will implement a fire wall with respect to its relevant
personnel andor such broker-dealer affiliate as applicable regarding access to
information concerning the composition andor changes to the portfolio and will be
subject to procedures designed to prevent the use and dissemination of material
non-public information regarding such portfolio The Fund does not currently intend to
use a sub-adviser
First Trust Strategic Floating Rate ETF
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions8 at least 80 of its
The term ldquounder normal market conditionsrdquo as used herein includes but is not limited to the absence of adverse market economic political or other conditions including extreme volatility or trading halts in the fixed income markets or the financial markets generally operational issues causing dissemination of inaccurate market information or force majeure type events such as systems failure natural or man-made disaster act of God armed conflict act of terrorism riot or labor disruption or any similar intervening circumstance For temporary defensive purposes during the initial invest-up period and during periods of high cash inflows or outflows the Fund may depart from its principal investment strategies for example it may hold a higher than normal proportion of its assets in cash During such periods the Fund may not be able to achieve its investment objective The Fund may adopt a defensive strategy when the Adviser believes securities in which the Fund normally invests have elevated risks due to political or economic factors and in other extraordinary circumstances
SR-NASDAQ-2015-011 Amendment No 2 Page 38 of 64
net assets in a portfolio of the following types of floating-rate9 debt instruments issued by
US and non-US public- and private-sector entities floating-rate corporate10 and
government bonds and notes floating-rate agency securities 11 floating-rate instruments
of non-US issuers floating-rate privately-issued securities 12 floating-rate asset-backed
securities 13 floating-rate mortgage-backed securities14 floating-rate loans 15 and
9 For the avoidance of doubt the term ldquofloating-raterdquo shall also include similar terms such as ldquovariable-raterdquo and ldquoadjustable-raterdquo
10 The Adviser expects that under normal market conditions generally for a corporate bond to be considered as an eligible investment after taking into account such an investment at least 75 of the Fundrsquos net assets that are invested in floating-rate corporate bonds and as described below fixed-rate corporate bonds (in the aggregate) will be comprised of corporate bonds that have at the time of original issuance $100 million or more par amount outstanding
11 ldquoAgency securitiesrdquo for these purposes generally includes securities issued by the following entities Government National Mortgage Association (Ginnie Mae) Federal National Mortgage Association (Fannie Mae) Federal Home Loan Banks (FHLBanks) Federal Home Loan Mortgage Corporation (Freddie Mac) Farm Credit System (FCS) Farm Credit Banks (FCBanks) Student Loan Marketing Association (Sallie Mae) Resolution Funding Corporation (REFCORP) Financing Corporation (FICO) and the Farm Credit System (FCS) Financial Assistance Corporation (FAC) Agency securities can include but are not limited to mortgage-backed securities
12 ldquoPrivately-issued securitiesrdquo for these purposes generally includes Rule 144A securities other than mortgage-backed Rule 144A securities Under normal market conditions privately-issued securities will have at the time of original issuance $100 million or more principal amount outstanding to be considered eligible investments
13 Asset-backed securities are securities that are backed by a pool of assets The Fund currently intends to invest in asset-backed securities that are consumer asset-backed securities
14 Mortgage-backed securities which are securities that directly or indirectly represent a participation in or are secured by and payable from mortgage loans on real property will consist of (1) residential mortgage-backed securities (ldquoRMBSrdquo) (2) commercial mortgage-backed securities (ldquoCMBSrdquo) (3) stripped mortgage-backed securities (ldquoSMBSrdquo) which are mortgage-backed securities
SR-NASDAQ-2015-011 Amendment No 2 Page 39 of 64
investment companies16 (including investment companies advised by the Adviser) that
invest primarily in the foregoing types of debt instruments17 (collectively ldquoFloating Rate
Debt Instrumentsrdquo)
where mortgage payments are divided between paying the loanrsquos principal and paying the loanrsquos interest (4) collateralized mortgage obligations (ldquoCMOsrdquo) and real estate mortgage investment conduits (ldquoREMICsrdquo) which are mortgage-backed securities that are divided into multiple classes with each class being entitled to a different share of the principal and interest payments received from the pool of underlying assets
15 The floating-rate loans in which the Fund will invest will represent amounts borrowed by companies or other entities from banks and other lenders and a significant portion of such floating-rate loans may be rated below investment grade or unrated Floating-rate loans held by the Fund may be senior or subordinate obligations of the borrower and may or may not be secured by collateral First lien senior secured floating-rate loans are referred to herein as ldquosenior loansrdquo Floating-rate loans that are not senior loans (ie unsecured floating-rate loans and secured floating-rate loans that are not first lien floating-rate loans) are referred to herein as ldquojunior loansrdquo The Fund will generally invest in floating-rate loans that the Adviser deems to be liquid with readily available prices notwithstanding the foregoing the Fund may invest in floating-rate loans that are deemed illiquid so long as the Fund complies with the 15 limitation on investments of its net assets in illiquid assets described below under ldquoInvestment Restrictionsrdquo
16 The Fund currently anticipates investing only in registered open-end investment companies that are listed and traded in the US on registered exchanges (ie other ETFs) An ETF is an investment company registered under the 1940 Act that holds a portfolio of securities Many ETFs are designed to track the performance of a securities index including industry sector country and region indexes The Fund may invest in the securities of ETFs in excess of the limits imposed under the 1940 Act pursuant to exemptive orders obtained by other ETFs and their sponsors from the Commission In addition the Fund may invest in the securities of certain investment companies in excess of the limits imposed under the 1940 Act pursuant to an exemptive order obtained by the Trust and the Adviser from the Commission See Investment Company Act Release No 30377 (February 5 2013) (File No 812-13895) The ETFs in which the Fund may invest include Index Fund Shares (as described in Nasdaq Rule 5705) Portfolio Depository Receipts (as described in Nasdaq Rule 5705) and Managed Fund Shares (as described in Nasdaq Rule 5735) While the Fund may invest in inverse ETFs the Fund will not invest in leveraged or inverse leveraged (eg 2X or -3X) ETFs
SR-NASDAQ-2015-011 Amendment No 2 Page 40 of 64
At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade To be considered
ldquoinvestment graderdquo under normal market conditions rated Floating Rate Debt
Instruments will carry at the time of purchase a rating in the highest four rating
categories of at least one nationally recognized statistical ratings organization
(ldquoNRSROrdquo) (eg BBB- or higher by Standard amp Poorrsquos Ratings Services (ldquoSampPrdquo)
andor Fitch Ratings (ldquoFitchrdquo) or Baa3 or higher by Moodyrsquos Investors Service Inc
(ldquoMoodyrsquosrdquo)18 For unrated securities to be considered ldquoinvestment graderdquo under normal
market conditions such securities will be determined at the time of purchase to be of
comparable quality19 by the Adviser The Fund may invest up to 35 of its net assets in
securities that are at the time of investment rated below investment grade by each
NRSRO rating such securities (or securities that are unrated and determined by the
17 The liquidity of a security especially in the case of asset-backed and mortgage-backed securities will be a substantial factor in the Fundrsquos security selection process Consistent with the discussion below under ldquoInvestment Restrictionsrdquo the Fund will not purchase any Floating Rate Debt Instruments (including asset-backed securities and mortgage-backed securities) that in the Adviserrsquos opinion are illiquid if as a result more than 15 of the value of the Fundrsquos net assets will be invested in illiquid assets
18 For the avoidance of doubt if a security is rated by multiple NRSROs and receives different ratings the Fund will treat the security as being rated in the highest rating category received from an NRSRO
19 Comparable quality of unrated securities will be determined by the Adviser based on fundamental credit analysis of the unrated security and comparable NRSRO-rated securities On a best efforts basis the Adviser will attempt to make a rating determination based on publicly available data In making a ldquocomparable qualityrdquo determination the Adviser may consider for example whether the issuer of the security has issued other rated securities the nature and provisions of the relevant security whether the obligations under the relevant security are guaranteed by another entity and the rating of such guarantor (if any) relevant cash flows macroeconomic analysis andor sector or industry analysis
SR-NASDAQ-2015-011 Amendment No 2 Page 41 of 64
Adviser to be of comparable quality) commonly referred to as ldquohigh yieldrdquo or ldquojunkrdquo
bonds If subsequent to purchase by the Fund a security held by the Fund experiences a
decline in credit quality and falls below investment grade the Fund may continue to hold
the security and it will not cause the Fund to violate the 35 investment limitation
however the security will be taken into account for purposes of determining whether
purchases of additional securities will cause the Fund to violate such limitation
The Fund will limit its investments in asset-backed securities (excluding agency
mortgage-backed securities) and non-agency mortgage-backed securities (in the
aggregate) to 20 of its net assets20 In addition the Fund will limit its investments in
junior loans to 20 of its net assets
The Fund will hold debt securities (including in the aggregate Floating Rate
Debt Instruments and the fixed-rate debt securities described below) of at least 13
non-affiliated issuers
Other Investments
Under normal market conditions the Fund will invest primarily in the Floating
Rate Debt Instruments described above to meet its investment objective In addition the
Fund may invest up to 20 of its net assets in the following types of fixed-rate debt
securities corporate21 and government bonds and notes agency securities22 instruments
20 For the avoidance of doubt there is no limitation on the Fundrsquos investments in agency mortgage-backed securities
21 See footnote 10 above
22 See footnote 11 above
SR-NASDAQ-2015-011 Amendment No 2 Page 42 of 64
of non-US issuers in developed markets privately-issued securities 23 asset-backed
securities 24 mortgage-backed securities 25 municipal bonds money market securities26
and investment companies27 (including investment companies advised by the Adviser)
that invest primarily in the foregoing types of debt securities
Further to pursue its investment objective the Fund may invest up to 20 of the
value of its net assets in exchange-listed options on US Treasury futures contracts and
exchange-listed US Treasury futures contracts28 The use of these derivative
transactions may allow the Fund to obtain net long or short exposures to selected interest
rates These derivatives may also be used to hedge risks including interest rate risks and
credit risks associated with the Fundrsquos portfolio investments The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
23 See footnote 12 above
24 See footnote 13 above
25 See footnote 14 above
26 ldquoMoney market securitiesrdquo for these purposes generally includes short-term high-quality obligations issued or guaranteed by the US Treasury or the agencies or instrumentalities of the US government short-term high-quality securities issued or guaranteed by non-US governments agencies and instrumentalities repurchase agreements commercial paper (both asset-backed and non-assetshybacked) and deposits and other obligations of US and non-US banks and financial institutions
27 See footnote 16 above
28 At least 90 of the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be invested in instruments that trade in markets that are members of the Intermarket Surveillance Group (ldquoISGrdquo) (see footnote 40 below) or are parties to a comprehensive surveillance sharing agreement with the Exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 43 of 64
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index
Investment Restrictions
The Fund will not invest 25 or more of the value of its total assets in securities
of issuers in any one industry This restriction does not apply to (a) obligations issued or
guaranteed by the US government its agencies or instrumentalities or (b) securities of
other investment companies29
The Fund may hold up to an aggregate amount of 15 of its net assets in illiquid
assets (calculated at the time of investment) including Rule 144A securities deemed
illiquid by the Adviser30 The Fund will monitor its portfolio liquidity on an ongoing
basis to determine whether in light of current circumstances an adequate level of
liquidity is being maintained and will consider taking appropriate steps in order to
maintain adequate liquidity if through a change in values net assets or other
circumstances more than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid
assets include securities subject to contractual or other restrictions on resale and other
29 See Form N-1A Item 9 The Commission has taken the position that a fund is concentrated if it invests more than 25 of the value of its total assets in any one industry See eg Investment Company Act Release No 9011 (October 30 1975) 40 FR 54241 (November 21 1975)
30 In reaching liquidity decisions the Adviser may consider the following factors the frequency of trades and quotes for the security the number of dealers wishing to purchase or sell the security and the number of other potential purchasers dealer undertakings to make a market in the security and the nature of the security and the nature of the marketplace in which it trades (eg the time needed to dispose of the security the method of soliciting offers and the mechanics of transfer)
SR-NASDAQ-2015-011 Amendment No 2 Page 44 of 64
instruments that lack readily available markets as determined in accordance with
Commission staff guidance31
The Fund will not invest in non-US equity securities
Creation and Redemption of Shares
The Fund will issue and redeem Shares on a continuous basis at net asset value
(ldquoNAVrdquo)32 only in large blocks of Shares (ldquoCreation Unitsrdquo) in transactions with
authorized participants generally including broker-dealers and large institutional
investors (ldquoAuthorized Participantsrdquo) Creation Units generally will consist of 50000
Shares although this may change from time to time Creation Units however are not
expected to consist of less than 50000 Shares As described in the Registration
Statement and consistent with the Exemptive Relief the Fund will issue and redeem
Creation Units in exchange for an in-kind portfolio of instruments andor cash in lieu of
31 The Commission has stated that long-standing Commission guidelines have required open-end funds to hold no more than 15 of their net assets in illiquid securities and other illiquid assets See Investment Company Act Release No 28193 (March 11 2008) 73 FR 14618 (March 18 2008) footnote 34 See also Investment Company Act Release No 5847 (October 21 1969) 35 FR 19989 (December 31 1970) (Statement Regarding ldquoRestricted Securitiesrdquo) Investment Company Act Release No 18612 (March 12 1992) 57 FR 9828 (March 20 1992) (Revisions of Guidelines to Form N-1A) A fundrsquos portfolio security is illiquid if it cannot be disposed of in the ordinary course of business within seven days at approximately the value ascribed to it by the fund See Investment Company Act Release No 14983 (March 12 1986) 51 FR 9773 (March 21 1986) (adopting amendments to Rule 2a-7 under the 1940 Act) Investment Company Act Release No 17452 (April 23 1990) 55 FR 17933 (April 30 1990) (adopting Rule 144A under the Securities Act of 1933)
32 The NAV of the Fundrsquos Shares generally will be calculated once daily Monday through Friday as of the close of regular trading on the New York Stock Exchange generally 400 pm Eastern Time (the ldquoNAV Calculation Timerdquo) NAV per Share will be calculated by dividing the Fundrsquos net assets by the number of Fund Shares outstanding For more information regarding the valuation of Fund investments in calculating the Fundrsquos NAV see the Registration Statement
SR-NASDAQ-2015-011 Amendment No 2 Page 45 of 64
such instruments (the ldquoCreation Basketrdquo) In addition if there is a difference between the
NAV attributable to a Creation Unit and the market value of the Creation Basket
exchanged for the Creation Unit the party conveying instruments with the lower value
will pay to the other an amount in cash equal to the difference (referred to as the ldquoCash
Componentrdquo)
Creations and redemptions must be made by or through an Authorized Participant
that has executed an agreement that has been agreed to by the Distributor and BNY with
respect to creations and redemptions of Creation Units All standard orders to create
Creation Units must be received by the transfer agent no later than the closing time of the
regular trading session on the New York Stock Exchange (ordinarily 400 pm Eastern
Time) (the ldquoClosing Timerdquo) in each case on the date such order is placed in order for the
creation of Creation Units to be effected based on the NAV of Shares as next determined
on such date after receipt of the order in proper form Shares may be redeemed only in
Creation Units at their NAV next determined after receipt not later than the Closing Time
of a redemption request in proper form by the Fund through the transfer agent and only
on a business day
The Fundrsquos custodian through the National Securities Clearing Corporation will
make available on each business day prior to the opening of business of the Exchange
the list of the names and quantities of the instruments comprising the Creation Basket as
well as the estimated Cash Component (if any) for that day The published Creation
Basket will apply until a new Creation Basket is announced on the following business
day prior to commencement of trading in the Shares
SR-NASDAQ-2015-011 Amendment No 2 Page 46 of 64
Net Asset Value
The Fundrsquos NAV will be determined as of the close of trading (normally
400 pm Eastern Time) on each day the New York Stock Exchange is open for
business NAV will be calculated for the Fund by taking the market price of the Fundrsquos
total assets including interest or dividends accrued but not yet collected less all
liabilities and dividing such amount by the total number of Shares outstanding The
result rounded to the nearest cent will be the NAV per Share All valuations will be
subject to review by the Board of Trustees of the Trust (ldquoTrust Boardrdquo) or its delegate
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with valuation procedures (which may be revised from time to time) adopted by the Trust
Board (the ldquoValuation Proceduresrdquo) and in accordance with the 1940 Act A market
valuation generally means a valuation (i) obtained from an exchange an independent
pricing service (ldquoPricing Servicerdquo) or a major market maker (or dealer) or (ii) based on a
price quotation or other equivalent indication of value supplied by an exchange a Pricing
Service or a major market maker (or dealer) The information summarized below is
based on the Valuation Procedures as currently in effect however as noted above the
Valuation Procedures are amended from time to time and therefore such information is
subject to change
Certain securities including Floating Rate Debt Instruments in which the Fund
may invest will not be listed on any securities exchange or board of trade Such
securities will typically be bought and sold by institutional investors in individually
negotiated private transactions that function in many respects like an over-the-counter
SR-NASDAQ-2015-011 Amendment No 2 Page 47 of 64
secondary market although typically no formal market makers will exist Certain
securities particularly debt securities will have few or no trades or trade infrequently
and information regarding a specific security may not be widely available or may be
incomplete Accordingly determinations of the fair value of debt securities may be
based on infrequent and dated information Because there is less reliable objective data
available elements of judgment may play a greater role in valuation of debt securities
than for other types of securities Typically Floating Rate Debt Instruments and other
debt securities in which the Fund may invest (other than those described below) will be
valued using information provided by a Pricing Service Debt securities having a
remaining maturity of 60 days or less when purchased will be valued at cost adjusted for
amortization of premiums and accretion of discounts provided the Adviserrsquos pricing
committee (the ldquoPricing Committeerdquo) has determined that the use of amortized cost is an
appropriate reflection of fair value given market and issuer-specific conditions existing at
the time of the determination Overnight repurchase agreements will be valued at cost
and term repurchase agreements (ie those whose maturity exceeds seven days) will be
valued at the average of the bid quotations obtained daily from at least two recognized
dealers
Asset-backed and mortgage-backed securities will generally be valued by using a
Pricing Service If a Pricing Service does not cover a particular asset-backed or
mortgage-backed security or discontinues covering a particular asset-backed or
mortgage-backed security the security will be priced using broker quotes generally
provided by brokers that make or participate in markets in the security To derive values
Pricing Services and broker-dealers may use matrix pricing and valuation models as well
SR-NASDAQ-2015-011 Amendment No 2 Page 48 of 64
as recent market transactions for the same or similar assets As it deems appropriate the
Pricing Committee may determine that a Pricing Service price does not represent an
accurate value of an asset-backed or mortgage-backed security based on broker quotes it
receives a recent trade in the security by the Fund information from a portfolio manager
or other market information In the event that the Pricing Committee determines that the
Pricing Service price is unreliable or inaccurate based on such other information broker
quotes may be used Additionally if the Pricing Committee determines that the price of
an asset-backed or mortgage-backed security obtained from a Pricing Service and
available broker quotes is unreliable or inaccurate due to market conditions or other
reasons or if a Pricing Service price or broker quote is unavailable the security will be
valued using fair value pricing as described below
Equity securities listed on any exchange other than the Exchange will be valued at
the last sale price on the exchange on which they are principally traded on the business
day as of which such value is being determined Equity securities listed on the Exchange
will be valued at the official closing price on the business day as of which such value is
being determined If there has been no sale on such day or no official closing price in
the case of securities traded on the Exchange the securities will be valued using fair
value pricing as described below Equity securities traded on more than one securities
exchange will be valued at the last sale price or official closing price as applicable on
the business day as of which such value is being determined at the close of the exchange
representing the principal market for such securities
Exchange-traded options and futures contracts will be valued at the closing price
in the market where such contracts are principally traded
SR-NASDAQ-2015-011 Amendment No 2 Page 49 of 64
Certain securities including Floating Rate Debt Instruments in which the Fund
will invest will not be able to be priced by pre-established pricing methods Such
securities may be valued by the Trust Board or its delegate at fair value The use of fair
value pricing by the Fund will be governed by the Valuation Procedures and conducted in
accordance with the provisions of the 1940 Act Valuing the Fundrsquos securities using fair
value pricing will result in using prices for those securities that may differ from current
market valuations or official closing prices on the applicable exchange
Availability of Information
The Fundrsquos website (wwwftportfolioscom) which will be publicly available
prior to the public offering of Shares will include a form of the prospectus for the Fund
that may be downloaded The website will include the Sharesrsquo ticker CUSIP and
exchange information along with additional quantitative information updated on a daily
basis including for the Fund (1) daily trading volume the prior business dayrsquos reported
NAV and closing price mid-point of the bidask spread at the time of calculation of such
NAV (the ldquoBidAsk Pricerdquo)33 and a calculation of the premium and discount of the
BidAsk Price against the NAV and (2) data in chart format displaying the frequency
distribution of discounts and premiums of the daily BidAsk Price against the NAV
within appropriate ranges for each of the four previous calendar quarters On each
business day before commencement of trading in Shares in the Regular Market Session34
33 The BidAsk Price of the Fund will be determined using the mid-point of the highest bid and the lowest offer on the Exchange as of the time of calculation of the Fundrsquos NAV The records relating to BidAsk Prices will be retained by the Fund and its service providers
34 See Nasdaq Rule 4120(b)(4) (describing the three trading sessions on the Exchange (1) Pre-Market Session from 4 am to 930 am Eastern Time (2)
SR-NASDAQ-2015-011 Amendment No 2 Page 50 of 64
on the Exchange the Fund will disclose on its website the identities and quantities of the
portfolio of securities and other assets (the ldquoDisclosed Portfoliordquo as defined in Nasdaq
Rule 5735(c)(2)) held by the Fund that will form the basis for the Fundrsquos calculation of
NAV at the end of the business day 35 The Fundrsquos disclosure of derivative positions in
the Disclosed Portfolio will include information that market participants can use to value
these positions intraday On a daily basis the Fund will disclose on the Fundrsquos website
the following information regarding each portfolio holding as applicable to the type of
holding ticker symbol CUSIP number or other identifier if any a description of the
holding (including the type of holding) the identity of the security or other asset or
instrument underlying the holding if any for options the option strike price quantity
held (as measured by for example par value notional value or number of shares
contracts or units) maturity date if any coupon rate if any effective date if any market
value of the holding and percentage weighting of the holding in the Fundrsquos portfolio
The website information will be publicly available at no charge
In addition for the Fund an estimated value defined in Rule 5735(c)(3) as the
ldquoIntraday Indicative Valuerdquo that reflects an estimated intraday value of the Fundrsquos
Disclosed Portfolio will be disseminated Moreover the Intraday Indicative Value
Regular Market Session from 930 am to 4 pm or 415 pm Eastern Time and (3) Post-Market Session from 4 pm or 415 pm to 8 pm Eastern Time)
Under accounting procedures to be followed by the Fund trades made on the prior business day (ldquoTrdquo) will be booked and reflected in NAV on the current business day (ldquoT+1rdquo) Accordingly the Fund will be able to disclose at the beginning of the business day the portfolio that will form the basis for the NAV calculation at the end of the business day
35
SR-NASDAQ-2015-011 Amendment No 2 Page 51 of 64
available on the NASDAQ OMX Information LLC proprietary index data service36 will
be based upon the current value for the components of the Disclosed Portfolio and will be
updated and widely disseminated by one or more major market data vendors and broadly
displayed at least every 15 seconds during the Regular Market Session The Intraday
Indicative Value will be based on quotes and closing prices from the securitiesrsquo local
market and may not reflect events that occur subsequent to the local marketrsquos close
Premiums and discounts between the Intraday Indicative Value and the market price may
occur This should not be viewed as a ldquoreal timerdquo update of the NAV per Share of the
Fund which is calculated only once a day
The dissemination of the Intraday Indicative Value together with the Disclosed
Portfolio will allow investors to determine the value of the underlying portfolio of the
Fund on a daily basis and will provide a close estimate of that value throughout the
trading day
Investors will also be able to obtain the Fundrsquos Statement of Additional
Information (ldquoSAIrdquo) the Fundrsquos annual and semi-annual reports (together ldquoShareholder
Reportsrdquo) and its Form N-CSR and Form N-SAR filed twice a year The Fundrsquos SAI
and Shareholder Reports will be available free upon request from the Fund and those
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or
downloaded from the Commissionrsquos website at wwwsecgov Information regarding
Currently the NASDAQ OMX Global Index Data Service (ldquoGIDSrdquo) is the NASDAQ OMX global index data feed service offering real-time updates daily summary messages and access to widely followed indexes and Intraday Indicative Values for ETFs GIDS provides investment professionals with the daily information needed to track or trade NASDAQ OMX indexes listed ETFs or third-party partner indexes and ETFs
36
SR-NASDAQ-2015-011 Amendment No 2 Page 52 of 64
market price and trading volume of the Shares will be continually available on a real-time
basis throughout the day on brokersrsquo computer screens and other electronic services
Information regarding the previous dayrsquos closing price and trading volume information
for the Shares will be published daily in the financial section of newspapers Quotation
and last sale information for the Shares will be available via Nasdaq proprietary quote
and trade services as well as in accordance with the Unlisted Trading Privileges and the
Consolidated Tape Association (ldquoCTArdquo) plans for the Shares Quotation and last sale
information for the other ETFs in which the Fund will invest will be available via the
quote and trade services of their respective primary exchanges as well as in accordance
with the Unlisted Trading Privileges and the CTA plans as applicable Quotation and
last sale information for US exchange-traded options will be available via the Options
Price Reporting Authority Intraday executable price quotations on Floating Rate Debt
Instruments and other assets not traded on an exchange will be available from major
broker-dealer firms or market data vendors as well as from automated quotation systems
published or other public sources or online information services Additionally the Trade
Reporting and Compliance Engine (ldquoTRACErdquo) of the Financial Industry Regulatory
Authority (ldquoFINRArdquo) will be a source of price information for corporate bonds
privately-issued securities mortgage-backed securities and asset-backed securities to the
extent transactions in such securities are reported to TRACE37 For exchange-traded
Broker-dealers that are FINRA member firms have an obligation to report transactions in specified debt securities to TRACE to the extent required under applicable FINRA rules Generally such debt securities will have at issuance a maturity that exceeds one calendar year
37
SR-NASDAQ-2015-011 Amendment No 2 Page 53 of 64
assets intraday pricing information will be available directly from the applicable listing
exchange
Additional information regarding the Fund and the Shares including investment
strategies risks creation and redemption procedures fees Fund holdings disclosure
policies distributions and taxes will be included in the Registration Statement
Initial and Continued Listing
The Shares will be subject to Rule 5735 which sets forth the initial and continued
listing criteria applicable to Managed Fund Shares The Exchange represents that for
initial andor continued listing the Fund must be in compliance with Rule 10A-338 under
the Act A minimum of 100000 Shares will be outstanding at the commencement of
trading on the Exchange The Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the NAV and the
Disclosed Portfolio will be made available to all market participants at the same time
Trading Halts
With respect to trading halts the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading in the Shares of the Fund Nasdaq will
halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12) Trading may be
halted because of market conditions or for reasons that in the view of the Exchange
make trading in the Shares inadvisable These may include (1) the extent to which
trading is not occurring in the securities andor the other assets constituting the Disclosed
Portfolio of the Fund or (2) whether other unusual conditions or circumstances
See 17 CFR 24010A-3 38
SR-NASDAQ-2015-011 Amendment No 2 Page 54 of 64
detrimental to the maintenance of a fair and orderly market are present Trading in the
Shares also will be subject to Rule 5735(d)(2)(D) which sets forth circumstances under
which Shares of the Fund may be halted
Trading Rules
Nasdaq deems the Shares to be equity securities thus rendering trading in the
Shares subject to Nasdaqrsquos existing rules governing the trading of equity securities
Nasdaq will allow trading in the Shares from 400 am until 800 pm Eastern Time
The Exchange has appropriate rules to facilitate transactions in the Shares during all
trading sessions As provided in Nasdaq Rule 5735(b)(3) the minimum price variation
for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $001
Surveillance
The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws39 The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities laws
The surveillances referred to above generally focus on detecting securities trading
outside their normal patterns which could be indicative of manipulative or other violative
activity When such situations are detected surveillance analysis follows and
FINRA surveils trading on the Exchange pursuant to a regulatory services agreement The Exchange is responsible for FINRArsquos performance under this regulatory services agreement
39
SR-NASDAQ-2015-011 Amendment No 2 Page 55 of 64
investigations are opened where appropriate to review the behavior of all relevant
parties for all relevant trading violations
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 56 of 64
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
SR-NASDAQ-2015-011 Amendment No 2 Page 57 of 64
2 Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
SR-NASDAQ-2015-011 Amendment No 2 Page 58 of 64
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
SR-NASDAQ-2015-011 Amendment No 2 Page 59 of 64
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
SR-NASDAQ-2015-011 Amendment No 2 Page 60 of 64
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 61 of 64
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
SR-NASDAQ-2015-011 Amendment No 2 Page 62 of 64
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
B Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
C Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received From Members Participants or Others
Written comments were neither solicited nor received
III Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Within 45 days of the date of publication of this notice in the Federal Register or
within such longer period (i) as the Commission may designate up to 90 days of such date
if it finds such longer period to be appropriate and publishes its reasons for so finding or
(ii) as to which the Exchange consents the Commission shall (a) by order approve or
disapprove such proposed rule change or (b) institute proceedings to determine whether
the proposed rule change should be disapproved
SR-NASDAQ-2015-011 Amendment No 2 Page 63 of 64
IV Solicitation of Comments
Interested persons are invited to submit written data views and arguments
concerning the foregoing including whether the proposed rule change is consistent with
the Act Comments may be submitted by any of the following methods
Electronic comments
bull Use the Commissionrsquos Internet comment form
(httpwwwsecgovrulessroshtml) or
bull Send an e-mail to rule-commentssecgov Please include File Number
SR-NASDAQ-2015-011 on the subject line
Paper comments
bull Send paper comments in triplicate to Brent J Fields Secretary Securities and
Exchange Commission Station Place 100 F Street NE Washington DC
20549-9303
All submissions should refer to File Number SR-NASDAQ-2015-011 This file number
should be included on the subject line if e-mail is used To help the Commission process
and review your comments more efficiently please use only one method The
Commission will post all comments on the Commissionrsquos Internet website
httpwwwsecgovrulessroshtml
Copies of the submission all subsequent amendments all written statements with
respect to the proposed rule change that are filed with the Commission and all written
communications relating to the proposed rule change between the Commission and any
person other than those that may be withheld from the public in accordance with the
provisions of 5 USC 552 will be available for website viewing and printing in the
Commissionrsquos Public Reference Room 100 F Street NE Washington DC 20549 on
SR-NASDAQ-2015-011 Amendment No 2 Page 64 of 64
official business days between the hours of 1000 am and 300 pm Copies of the filing
also will be available for inspection and copying at the principal office of Nasdaq All
comments received will be posted without change the Commission does not edit
personal identifying information from submissions You should submit only information
that you wish to make available publicly
All submissions should refer to File Number SR-NASDAQ-2015-011 and should
be submitted on or before [insert date 21 days from publication in the Federal Register]
For the Commission by the Division of Trading and Markets pursuant to
delegated authority41
Kevin M OrsquoNeill Deputy Secretary
17 CFR 20030-3(a)(12) 41
SR-NASDAQ-2015-011 Amendment No 2 Page 18 of 64
Certain securities including Floating Rate Debt Instruments in which the Fund
will invest will not be able to be priced by pre-established pricing methods Such
securities may be valued by the Trust Board or its delegate at fair value The use of fair
value pricing by the Fund will be governed by the Valuation Procedures and conducted in
accordance with the provisions of the 1940 Act Valuing the Fundrsquos securities using fair
value pricing will result in using prices for those securities that may differ from current
market valuations or official closing prices on the applicable exchange
Availability of Information
The Fundrsquos website (wwwftportfolioscom) which will be publicly available
prior to the public offering of Shares will include a form of the prospectus for the Fund
that may be downloaded The website will include the Sharesrsquo ticker CUSIP and
exchange information along with additional quantitative information updated on a daily
basis including for the Fund (1) daily trading volume the prior business dayrsquos reported
NAV and closing price mid-point of the bidask spread at the time of calculation of such
NAV (the ldquoBidAsk Pricerdquo)33 and a calculation of the premium and discount of the
BidAsk Price against the NAV and (2) data in chart format displaying the frequency
distribution of discounts and premiums of the daily BidAsk Price against the NAV
within appropriate ranges for each of the four previous calendar quarters On each
business day before commencement of trading in Shares in the Regular Market Session34
33 The BidAsk Price of the Fund will be determined using the mid-point of the highest bid and the lowest offer on the Exchange as of the time of calculation of the Fundrsquos NAV The records relating to BidAsk Prices will be retained by the Fund and its service providers
34 See Nasdaq Rule 4120(b)(4) (describing the three trading sessions on the Exchange (1) Pre-Market Session from 4 am to 930 am Eastern Time (2)
SR-NASDAQ-2015-011 Amendment No 2 Page 19 of 64
on the Exchange the Fund will disclose on its website the identities and quantities of the
portfolio of securities and other assets (the ldquoDisclosed Portfoliordquo as defined in Nasdaq
Rule 5735(c)(2)) held by the Fund that will form the basis for the Fundrsquos calculation of
NAV at the end of the business day 35 The Fundrsquos disclosure of derivative positions in
the Disclosed Portfolio will include information that market participants can use to value
these positions intraday On a daily basis the Fund will disclose on the Fundrsquos website
the following information regarding each portfolio holding as applicable to the type of
holding ticker symbol CUSIP number or other identifier if any a description of the
holding (including the type of holding) the identity of the security or other asset or
instrument underlying the holding if any for options the option strike price quantity
held (as measured by for example par value notional value or number of shares
contracts or units) maturity date if any coupon rate if any effective date if any market
value of the holding and percentage weighting of the holding in the Fundrsquos portfolio
The website information will be publicly available at no charge
In addition for the Fund an estimated value defined in Rule 5735(c)(3) as the
ldquoIntraday Indicative Valuerdquo that reflects an estimated intraday value of the Fundrsquos
Disclosed Portfolio will be disseminated Moreover the Intraday Indicative Value
Regular Market Session from 930 am to 4 pm or 415 pm Eastern Time and (3) Post-Market Session from 4 pm or 415 pm to 8 pm Eastern Time)
Under accounting procedures to be followed by the Fund trades made on the prior business day (ldquoTrdquo) will be booked and reflected in NAV on the current business day (ldquoT+1rdquo) Accordingly the Fund will be able to disclose at the beginning of the business day the portfolio that will form the basis for the NAV calculation at the end of the business day
35
SR-NASDAQ-2015-011 Amendment No 2 Page 20 of 64
available on the NASDAQ OMX Information LLC proprietary index data service36 will
be based upon the current value for the components of the Disclosed Portfolio and will be
updated and widely disseminated by one or more major market data vendors and broadly
displayed at least every 15 seconds during the Regular Market Session The Intraday
Indicative Value will be based on quotes and closing prices from the securitiesrsquo local
market and may not reflect events that occur subsequent to the local marketrsquos close
Premiums and discounts between the Intraday Indicative Value and the market price may
occur This should not be viewed as a ldquoreal timerdquo update of the NAV per Share of the
Fund which is calculated only once a day
The dissemination of the Intraday Indicative Value together with the Disclosed
Portfolio will allow investors to determine the value of the underlying portfolio of the
Fund on a daily basis and will provide a close estimate of that value throughout the
trading day
Investors will also be able to obtain the Fundrsquos Statement of Additional
Information (ldquoSAIrdquo) the Fundrsquos annual and semi-annual reports (together ldquoShareholder
Reportsrdquo) and its Form N-CSR and Form N-SAR filed twice a year The Fundrsquos SAI
and Shareholder Reports will be available free upon request from the Fund and those
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or
downloaded from the Commissionrsquos website at wwwsecgov Information regarding
market price and trading volume of the Shares will be continually available on a real-time
Currently the NASDAQ OMX Global Index Data Service (ldquoGIDSrdquo) is the NASDAQ OMX global index data feed service offering real-time updates daily summary messages and access to widely followed indexes and Intraday Indicative Values for ETFs GIDS provides investment professionals with the daily information needed to track or trade NASDAQ OMX indexes listed ETFs or third-party partner indexes and ETFs
36
SR-NASDAQ-2015-011 Amendment No 2 Page 21 of 64
basis throughout the day on brokersrsquo computer screens and other electronic services
Information regarding the previous dayrsquos closing price and trading volume information
for the Shares will be published daily in the financial section of newspapers Quotation
and last sale information for the Shares will be available via Nasdaq proprietary quote
and trade services as well as in accordance with the Unlisted Trading Privileges and the
Consolidated Tape Association (ldquoCTArdquo) plans for the Shares Quotation and last sale
information for the other ETFs in which the Fund will invest will be available via the
quote and trade services of their respective primary exchanges as well as in accordance
with the Unlisted Trading Privileges and the CTA plans as applicable Quotation and
last sale information for US exchange-traded options will be available via the Options
Price Reporting Authority Intraday executable price quotations on Floating Rate Debt
Instruments and other assets not traded on an exchange will be available from major
broker-dealer firms or market data vendors as well as from automated quotation systems
published or other public sources or online information services Additionally the Trade
Reporting and Compliance Engine (ldquoTRACErdquo) of the Financial Industry Regulatory
Authority (ldquoFINRArdquo) will be a source of price information for corporate bonds
privately-issued securities mortgage-backed securities and asset-backed securities to the
extent transactions in such securities are reported to TRACE37 For exchange-traded
assets intraday pricing information will be available directly from the applicable listing
exchange
Broker-dealers that are FINRA member firms have an obligation to report transactions in specified debt securities to TRACE to the extent required under applicable FINRA rules Generally such debt securities will have at issuance a maturity that exceeds one calendar year
37
SR-NASDAQ-2015-011 Amendment No 2 Page 22 of 64
Additional information regarding the Fund and the Shares including investment
strategies risks creation and redemption procedures fees Fund holdings disclosure
policies distributions and taxes will be included in the Registration Statement
Initial and Continued Listing
The Shares will be subject to Rule 5735 which sets forth the initial and continued
listing criteria applicable to Managed Fund Shares The Exchange represents that for
initial andor continued listing the Fund must be in compliance with Rule 10A-338 under
the Act A minimum of 100000 Shares will be outstanding at the commencement of
trading on the Exchange The Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the NAV and the
Disclosed Portfolio will be made available to all market participants at the same time
Trading Halts
With respect to trading halts the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading in the Shares of the Fund Nasdaq will
halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12) Trading may be
halted because of market conditions or for reasons that in the view of the Exchange
make trading in the Shares inadvisable These may include (1) the extent to which
trading is not occurring in the securities andor the other assets constituting the Disclosed
Portfolio of the Fund or (2) whether other unusual conditions or circumstances
detrimental to the maintenance of a fair and orderly market are present Trading in the
See 17 CFR 24010A-3 38
SR-NASDAQ-2015-011 Amendment No 2 Page 23 of 64
Shares also will be subject to Rule 5735(d)(2)(D) which sets forth circumstances under
which Shares of the Fund may be halted
Trading Rules
Nasdaq deems the Shares to be equity securities thus rendering trading in the
Shares subject to Nasdaqrsquos existing rules governing the trading of equity securities
Nasdaq will allow trading in the Shares from 400 am until 800 pm Eastern Time
The Exchange has appropriate rules to facilitate transactions in the Shares during all
trading sessions As provided in Nasdaq Rule 5735(b)(3) the minimum price variation
for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $001
Surveillance
The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws39 The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities laws
The surveillances referred to above generally focus on detecting securities trading
outside their normal patterns which could be indicative of manipulative or other violative
activity When such situations are detected surveillance analysis follows and
investigations are opened where appropriate to review the behavior of all relevant
parties for all relevant trading violations
FINRA surveils trading on the Exchange pursuant to a regulatory services agreement The Exchange is responsible for FINRArsquos performance under this regulatory services agreement
39
SR-NASDAQ-2015-011 Amendment No 2 Page 24 of 64
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 25 of 64
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
b Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
SR-NASDAQ-2015-011 Amendment No 2 Page 26 of 64
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
SR-NASDAQ-2015-011 Amendment No 2 Page 27 of 64
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
SR-NASDAQ-2015-011 Amendment No 2 Page 28 of 64
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
SR-NASDAQ-2015-011 Amendment No 2 Page 29 of 64
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
SR-NASDAQ-2015-011 Amendment No 2 Page 30 of 64
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
SR-NASDAQ-2015-011 Amendment No 2 Page 31 of 64
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
4 Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
5 Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received from Members Participants or Others
Written comments were neither solicited nor received
6 Extension of Time Period for Commission Action
The Exchange does not consent at this time to an extension of any time period for
Commission action
7 Basis for Summary Effectiveness Pursuant to Section 19(b)(3) or for Accelerated Effectiveness Pursuant to Section 19(b)(2)
Not applicable
8 Proposed Rule Change Based on Rules of Another Self-Regulatory Organization or of the Commission
Not applicable
9 Security-Based Swap Submissions Filed Pursuant to Section 3C of the Act
Not applicable
SR-NASDAQ-2015-011 Amendment No 2 Page 32 of 64
10 Advance Notices Filed Pursuant to Section 806(e) of the Payment Clearing and Settlement Supervision Act
Not applicable
11 Exhibits
1 Completed notice of proposed rule change for publication in the Federal
Register
SR-NASDAQ-2015-011 Amendment No 2 Page 33 of 64
EXHIBIT 1
SECURITIES AND EXCHANGE COMMISSION (Release No 34shy File No SR-NASDAQ-2015-011)
April __ 2015
Self-Regulatory Organizations The NASDAQ Stock Market LLC Notice of Filing of Proposed Rule Change Relating to the Listing and Trading of the Shares of the First Trust Strategic Floating Rate ETF of First Trust Exchange-Traded Fund IV
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (ldquoActrdquo)1 and
Rule 19b-4 thereunder2 notice is hereby given that on February 12 2015 The NASDAQ
Stock Market LLC (ldquoNasdaqrdquo or the ldquoExchangerdquo) filed with the Securities and Exchange
Commission (ldquoCommissionrdquo) the proposed rule change as described in in Items I II and
III below which Items have been prepared by Nasdaq On April 6 2015 Nasdaq filed
Amendment No 1 which replaced the text of the original filing in its entirety On April
15 2015 Nasdaq filed Amendment No 2 which replaced the text of the original filing in
its entirety The Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons
I Self-Regulatory Organizationrsquos Statement of the Terms of Substance of the Proposed Rule Change
Nasdaq proposes to list and trade the shares of the First Trust Strategic Floating
Rate ETF (the ldquoFundrdquo) of the First Trust Strategic Floating Rate ETF (the ldquoFundrdquo) of
First Trust Exchange-Traded Fund IV (the ldquoTrustrdquo) under Nasdaq Rule 5735 (ldquoManaged
1 15 USC 78s(b)(1)
2 17 CFR 24019b-4
SR-NASDAQ-2015-011 Amendment No 2 Page 34 of 64
Fund Sharesrdquo)3 The shares of the Fund are collectively referred to herein as the
ldquoSharesrdquo
The text of the proposed rule change is available at
httpnasdaqcchwallstreetcom at Nasdaqrsquos principal office and at the Commissionrsquos
Public Reference Room
II Self-Regulatory Organizationrsquos Statement of the Purpose of and Statutory Basis for the Proposed Rule Change
In its filing with the Commission Nasdaq included statements concerning the
purpose of and basis for the proposed rule change The text of these statements may be
examined at the places specified in Item IV below Nasdaq has prepared summaries set
forth in Sections A B and C below of the most significant aspects of such statements
A Self-Regulatory Organizationrsquos Statement of the Purpose of and Statutory Basis for the Proposed Rule Change
1 Purpose
The Exchange proposes to list and trade the Shares of the Fund under Nasdaq
Rule 5735 which governs the listing and trading of Managed Fund Shares4 on the
3 The Commission approved Nasdaq Rule 5735 in Securities Exchange Act Release No 57962 (June 13 2008) 73 FR 35175 (June 20 2008) (SR-NASDAQ-2008shy039) There are already multiple actively-managed funds listed on the Exchange see eg Securities Exchange Act Release Nos 69464 (April 26 2013) 78 FR 25774 (May 2 2013) (SR-NASDAQ-2013-036) (order approving listing and trading of First Trust Senior Loan Fund) 68972 (February 22 2013) 78 FR 13721 (February 28 2013) (SR-NASDAQ-2012-147) (order approving listing and trading of First Trust High Yield LongShort ETF) 66489 (February 29 2012) 77 FR 13379 (March 6 2012) (SR-NASDAQ-2012-004) (order approving listing and trading of WisdomTree Emerging Markets Corporate Bond Fund) The Exchange believes the proposed rule change raises no significant issues not previously addressed in those prior Commission orders
4 A Managed Fund Share is a security that represents an interest in an investment company registered under the Investment Company Act of 1940 (15 USC 80ashy
SR-NASDAQ-2015-011 Amendment No 2 Page 35 of 64
Exchange The Fund will be an actively-managed exchange-traded fund (ldquoETFrdquo) The
Shares will be offered by the Trust which was established as a Massachusetts business
trust on September 15 20105 The Trust is registered with the Commission as an
investment company and has filed a registration statement on Form N-1A (ldquoRegistration
Statementrdquo) with the Commission6 The Fund will be a series of the Trust The Fund
intends to qualify each year as a regulated investment company (ldquoRICrdquo) under
Subchapter M of the Internal Revenue Code of 1986 as amended
First Trust Advisors LP will be the investment adviser (ldquoAdviserrdquo) to the Fund
First Trust Portfolios LP (the ldquoDistributorrdquo) will be the principal underwriter and
distributor of the Fundrsquos Shares The Bank of New York Mellon Corporation (ldquoBNYrdquo)
will act as the administrator accounting agent custodian and transfer agent to the Fund
1) (the ldquo1940 Actrdquo) organized as an open-end investment company or similar entity that invests in a portfolio of securities selected by its investment adviser consistent with its investment objectives and policies In contrast an open-end investment company that issues Index Fund Shares listed and traded on the Exchange under Nasdaq Rule 5705 seeks to provide investment results that correspond generally to the price and yield performance of a specific foreign or domestic stock index fixed income securities index or combination thereof
5 The Commission has issued an order upon which the Trust may rely granting certain exemptive relief under the 1940 Act See Investment Company Act Release No 30029 (April 10 2012) (File No 812-13795) (the ldquoExemptive Reliefrdquo) In addition the Commission has issued no-action relief upon which the Trust may rely pertaining to the Fundrsquos ability to invest in derivatives notwithstanding certain representations in the application for the Exemptive Relief See Commission No-Action Letter (December 6 2012)
6 See Post-Effective Amendment No 104 to Registration Statement on Form N-1A for the Trust dated January 29 2015 (File Nos 333-174332 and 811-22559) The descriptions of the Fund and the Shares contained herein are based in part on information in the Registration Statement
7
SR-NASDAQ-2015-011 Amendment No 2 Page 36 of 64
Paragraph (g) of Rule 5735 provides that if the investment adviser to the
investment company issuing Managed Fund Shares is affiliated with a broker-dealer
such investment adviser shall erect a ldquofire wallrdquo between the investment adviser and the
broker-dealer with respect to access to information concerning the composition andor
changes to such investment company portfolio7 In addition paragraph (g) further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio Rule 5735(g) is similar
to Nasdaq Rule 5705(b)(5)(A)(i) however paragraph (g) in connection with the
establishment of a ldquofire wallrdquo between the investment adviser and the broker-dealer
reflects the applicable open-end fundrsquos portfolio not an underlying benchmark index as
is the case with index-based funds The Adviser is not a broker-dealer although it is
affiliated with the Distributor a broker-dealer The Adviser has implemented a fire wall
An investment adviser to an open-end fund is required to be registered under the Investment Advisers Act of 1940 (the ldquoAdvisers Actrdquo) As a result the Adviser and its related personnel are subject to the provisions of Rule 204A-1 under the Advisers Act relating to codes of ethics This Rule requires investment advisers to adopt a code of ethics that reflects the fiduciary nature of the relationship to clients as well as compliance with other applicable securities laws Accordingly procedures designed to prevent the communication and misuse of non-public information by an investment adviser must be consistent with Rule 204A-1 under the Advisers Act In addition Rule 206(4)-7 under the Advisers Act makes it unlawful for an investment adviser to provide investment advice to clients unless such investment adviser has (i) adopted and implemented written policies and procedures reasonably designed to prevent violation by the investment adviser and its supervised persons of the Advisers Act and the Commission rules adopted thereunder (ii) implemented at a minimum an annual review regarding the adequacy of the policies and procedures established pursuant to subparagraph (i) above and the effectiveness of their implementation and (iii) designated an individual (who is a supervised person) responsible for administering the policies and procedures adopted under subparagraph (i) above
8
SR-NASDAQ-2015-011 Amendment No 2 Page 37 of 64
with respect to its broker-dealer affiliate regarding access to information concerning the
composition andor changes to the portfolio In addition personnel who make decisions
on the Fundrsquos portfolio composition will be subject to procedures designed to prevent the
use and dissemination of material non-public information regarding the Fundrsquos portfolio
In the event (a) the Adviser becomes or becomes newly affiliated with a broker-dealer
or (b) any new adviser or sub-adviser is a registered broker-dealer or becomes affiliated
with another broker-dealer it will implement a fire wall with respect to its relevant
personnel andor such broker-dealer affiliate as applicable regarding access to
information concerning the composition andor changes to the portfolio and will be
subject to procedures designed to prevent the use and dissemination of material
non-public information regarding such portfolio The Fund does not currently intend to
use a sub-adviser
First Trust Strategic Floating Rate ETF
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions8 at least 80 of its
The term ldquounder normal market conditionsrdquo as used herein includes but is not limited to the absence of adverse market economic political or other conditions including extreme volatility or trading halts in the fixed income markets or the financial markets generally operational issues causing dissemination of inaccurate market information or force majeure type events such as systems failure natural or man-made disaster act of God armed conflict act of terrorism riot or labor disruption or any similar intervening circumstance For temporary defensive purposes during the initial invest-up period and during periods of high cash inflows or outflows the Fund may depart from its principal investment strategies for example it may hold a higher than normal proportion of its assets in cash During such periods the Fund may not be able to achieve its investment objective The Fund may adopt a defensive strategy when the Adviser believes securities in which the Fund normally invests have elevated risks due to political or economic factors and in other extraordinary circumstances
SR-NASDAQ-2015-011 Amendment No 2 Page 38 of 64
net assets in a portfolio of the following types of floating-rate9 debt instruments issued by
US and non-US public- and private-sector entities floating-rate corporate10 and
government bonds and notes floating-rate agency securities 11 floating-rate instruments
of non-US issuers floating-rate privately-issued securities 12 floating-rate asset-backed
securities 13 floating-rate mortgage-backed securities14 floating-rate loans 15 and
9 For the avoidance of doubt the term ldquofloating-raterdquo shall also include similar terms such as ldquovariable-raterdquo and ldquoadjustable-raterdquo
10 The Adviser expects that under normal market conditions generally for a corporate bond to be considered as an eligible investment after taking into account such an investment at least 75 of the Fundrsquos net assets that are invested in floating-rate corporate bonds and as described below fixed-rate corporate bonds (in the aggregate) will be comprised of corporate bonds that have at the time of original issuance $100 million or more par amount outstanding
11 ldquoAgency securitiesrdquo for these purposes generally includes securities issued by the following entities Government National Mortgage Association (Ginnie Mae) Federal National Mortgage Association (Fannie Mae) Federal Home Loan Banks (FHLBanks) Federal Home Loan Mortgage Corporation (Freddie Mac) Farm Credit System (FCS) Farm Credit Banks (FCBanks) Student Loan Marketing Association (Sallie Mae) Resolution Funding Corporation (REFCORP) Financing Corporation (FICO) and the Farm Credit System (FCS) Financial Assistance Corporation (FAC) Agency securities can include but are not limited to mortgage-backed securities
12 ldquoPrivately-issued securitiesrdquo for these purposes generally includes Rule 144A securities other than mortgage-backed Rule 144A securities Under normal market conditions privately-issued securities will have at the time of original issuance $100 million or more principal amount outstanding to be considered eligible investments
13 Asset-backed securities are securities that are backed by a pool of assets The Fund currently intends to invest in asset-backed securities that are consumer asset-backed securities
14 Mortgage-backed securities which are securities that directly or indirectly represent a participation in or are secured by and payable from mortgage loans on real property will consist of (1) residential mortgage-backed securities (ldquoRMBSrdquo) (2) commercial mortgage-backed securities (ldquoCMBSrdquo) (3) stripped mortgage-backed securities (ldquoSMBSrdquo) which are mortgage-backed securities
SR-NASDAQ-2015-011 Amendment No 2 Page 39 of 64
investment companies16 (including investment companies advised by the Adviser) that
invest primarily in the foregoing types of debt instruments17 (collectively ldquoFloating Rate
Debt Instrumentsrdquo)
where mortgage payments are divided between paying the loanrsquos principal and paying the loanrsquos interest (4) collateralized mortgage obligations (ldquoCMOsrdquo) and real estate mortgage investment conduits (ldquoREMICsrdquo) which are mortgage-backed securities that are divided into multiple classes with each class being entitled to a different share of the principal and interest payments received from the pool of underlying assets
15 The floating-rate loans in which the Fund will invest will represent amounts borrowed by companies or other entities from banks and other lenders and a significant portion of such floating-rate loans may be rated below investment grade or unrated Floating-rate loans held by the Fund may be senior or subordinate obligations of the borrower and may or may not be secured by collateral First lien senior secured floating-rate loans are referred to herein as ldquosenior loansrdquo Floating-rate loans that are not senior loans (ie unsecured floating-rate loans and secured floating-rate loans that are not first lien floating-rate loans) are referred to herein as ldquojunior loansrdquo The Fund will generally invest in floating-rate loans that the Adviser deems to be liquid with readily available prices notwithstanding the foregoing the Fund may invest in floating-rate loans that are deemed illiquid so long as the Fund complies with the 15 limitation on investments of its net assets in illiquid assets described below under ldquoInvestment Restrictionsrdquo
16 The Fund currently anticipates investing only in registered open-end investment companies that are listed and traded in the US on registered exchanges (ie other ETFs) An ETF is an investment company registered under the 1940 Act that holds a portfolio of securities Many ETFs are designed to track the performance of a securities index including industry sector country and region indexes The Fund may invest in the securities of ETFs in excess of the limits imposed under the 1940 Act pursuant to exemptive orders obtained by other ETFs and their sponsors from the Commission In addition the Fund may invest in the securities of certain investment companies in excess of the limits imposed under the 1940 Act pursuant to an exemptive order obtained by the Trust and the Adviser from the Commission See Investment Company Act Release No 30377 (February 5 2013) (File No 812-13895) The ETFs in which the Fund may invest include Index Fund Shares (as described in Nasdaq Rule 5705) Portfolio Depository Receipts (as described in Nasdaq Rule 5705) and Managed Fund Shares (as described in Nasdaq Rule 5735) While the Fund may invest in inverse ETFs the Fund will not invest in leveraged or inverse leveraged (eg 2X or -3X) ETFs
SR-NASDAQ-2015-011 Amendment No 2 Page 40 of 64
At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade To be considered
ldquoinvestment graderdquo under normal market conditions rated Floating Rate Debt
Instruments will carry at the time of purchase a rating in the highest four rating
categories of at least one nationally recognized statistical ratings organization
(ldquoNRSROrdquo) (eg BBB- or higher by Standard amp Poorrsquos Ratings Services (ldquoSampPrdquo)
andor Fitch Ratings (ldquoFitchrdquo) or Baa3 or higher by Moodyrsquos Investors Service Inc
(ldquoMoodyrsquosrdquo)18 For unrated securities to be considered ldquoinvestment graderdquo under normal
market conditions such securities will be determined at the time of purchase to be of
comparable quality19 by the Adviser The Fund may invest up to 35 of its net assets in
securities that are at the time of investment rated below investment grade by each
NRSRO rating such securities (or securities that are unrated and determined by the
17 The liquidity of a security especially in the case of asset-backed and mortgage-backed securities will be a substantial factor in the Fundrsquos security selection process Consistent with the discussion below under ldquoInvestment Restrictionsrdquo the Fund will not purchase any Floating Rate Debt Instruments (including asset-backed securities and mortgage-backed securities) that in the Adviserrsquos opinion are illiquid if as a result more than 15 of the value of the Fundrsquos net assets will be invested in illiquid assets
18 For the avoidance of doubt if a security is rated by multiple NRSROs and receives different ratings the Fund will treat the security as being rated in the highest rating category received from an NRSRO
19 Comparable quality of unrated securities will be determined by the Adviser based on fundamental credit analysis of the unrated security and comparable NRSRO-rated securities On a best efforts basis the Adviser will attempt to make a rating determination based on publicly available data In making a ldquocomparable qualityrdquo determination the Adviser may consider for example whether the issuer of the security has issued other rated securities the nature and provisions of the relevant security whether the obligations under the relevant security are guaranteed by another entity and the rating of such guarantor (if any) relevant cash flows macroeconomic analysis andor sector or industry analysis
SR-NASDAQ-2015-011 Amendment No 2 Page 41 of 64
Adviser to be of comparable quality) commonly referred to as ldquohigh yieldrdquo or ldquojunkrdquo
bonds If subsequent to purchase by the Fund a security held by the Fund experiences a
decline in credit quality and falls below investment grade the Fund may continue to hold
the security and it will not cause the Fund to violate the 35 investment limitation
however the security will be taken into account for purposes of determining whether
purchases of additional securities will cause the Fund to violate such limitation
The Fund will limit its investments in asset-backed securities (excluding agency
mortgage-backed securities) and non-agency mortgage-backed securities (in the
aggregate) to 20 of its net assets20 In addition the Fund will limit its investments in
junior loans to 20 of its net assets
The Fund will hold debt securities (including in the aggregate Floating Rate
Debt Instruments and the fixed-rate debt securities described below) of at least 13
non-affiliated issuers
Other Investments
Under normal market conditions the Fund will invest primarily in the Floating
Rate Debt Instruments described above to meet its investment objective In addition the
Fund may invest up to 20 of its net assets in the following types of fixed-rate debt
securities corporate21 and government bonds and notes agency securities22 instruments
20 For the avoidance of doubt there is no limitation on the Fundrsquos investments in agency mortgage-backed securities
21 See footnote 10 above
22 See footnote 11 above
SR-NASDAQ-2015-011 Amendment No 2 Page 42 of 64
of non-US issuers in developed markets privately-issued securities 23 asset-backed
securities 24 mortgage-backed securities 25 municipal bonds money market securities26
and investment companies27 (including investment companies advised by the Adviser)
that invest primarily in the foregoing types of debt securities
Further to pursue its investment objective the Fund may invest up to 20 of the
value of its net assets in exchange-listed options on US Treasury futures contracts and
exchange-listed US Treasury futures contracts28 The use of these derivative
transactions may allow the Fund to obtain net long or short exposures to selected interest
rates These derivatives may also be used to hedge risks including interest rate risks and
credit risks associated with the Fundrsquos portfolio investments The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
23 See footnote 12 above
24 See footnote 13 above
25 See footnote 14 above
26 ldquoMoney market securitiesrdquo for these purposes generally includes short-term high-quality obligations issued or guaranteed by the US Treasury or the agencies or instrumentalities of the US government short-term high-quality securities issued or guaranteed by non-US governments agencies and instrumentalities repurchase agreements commercial paper (both asset-backed and non-assetshybacked) and deposits and other obligations of US and non-US banks and financial institutions
27 See footnote 16 above
28 At least 90 of the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be invested in instruments that trade in markets that are members of the Intermarket Surveillance Group (ldquoISGrdquo) (see footnote 40 below) or are parties to a comprehensive surveillance sharing agreement with the Exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 43 of 64
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index
Investment Restrictions
The Fund will not invest 25 or more of the value of its total assets in securities
of issuers in any one industry This restriction does not apply to (a) obligations issued or
guaranteed by the US government its agencies or instrumentalities or (b) securities of
other investment companies29
The Fund may hold up to an aggregate amount of 15 of its net assets in illiquid
assets (calculated at the time of investment) including Rule 144A securities deemed
illiquid by the Adviser30 The Fund will monitor its portfolio liquidity on an ongoing
basis to determine whether in light of current circumstances an adequate level of
liquidity is being maintained and will consider taking appropriate steps in order to
maintain adequate liquidity if through a change in values net assets or other
circumstances more than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid
assets include securities subject to contractual or other restrictions on resale and other
29 See Form N-1A Item 9 The Commission has taken the position that a fund is concentrated if it invests more than 25 of the value of its total assets in any one industry See eg Investment Company Act Release No 9011 (October 30 1975) 40 FR 54241 (November 21 1975)
30 In reaching liquidity decisions the Adviser may consider the following factors the frequency of trades and quotes for the security the number of dealers wishing to purchase or sell the security and the number of other potential purchasers dealer undertakings to make a market in the security and the nature of the security and the nature of the marketplace in which it trades (eg the time needed to dispose of the security the method of soliciting offers and the mechanics of transfer)
SR-NASDAQ-2015-011 Amendment No 2 Page 44 of 64
instruments that lack readily available markets as determined in accordance with
Commission staff guidance31
The Fund will not invest in non-US equity securities
Creation and Redemption of Shares
The Fund will issue and redeem Shares on a continuous basis at net asset value
(ldquoNAVrdquo)32 only in large blocks of Shares (ldquoCreation Unitsrdquo) in transactions with
authorized participants generally including broker-dealers and large institutional
investors (ldquoAuthorized Participantsrdquo) Creation Units generally will consist of 50000
Shares although this may change from time to time Creation Units however are not
expected to consist of less than 50000 Shares As described in the Registration
Statement and consistent with the Exemptive Relief the Fund will issue and redeem
Creation Units in exchange for an in-kind portfolio of instruments andor cash in lieu of
31 The Commission has stated that long-standing Commission guidelines have required open-end funds to hold no more than 15 of their net assets in illiquid securities and other illiquid assets See Investment Company Act Release No 28193 (March 11 2008) 73 FR 14618 (March 18 2008) footnote 34 See also Investment Company Act Release No 5847 (October 21 1969) 35 FR 19989 (December 31 1970) (Statement Regarding ldquoRestricted Securitiesrdquo) Investment Company Act Release No 18612 (March 12 1992) 57 FR 9828 (March 20 1992) (Revisions of Guidelines to Form N-1A) A fundrsquos portfolio security is illiquid if it cannot be disposed of in the ordinary course of business within seven days at approximately the value ascribed to it by the fund See Investment Company Act Release No 14983 (March 12 1986) 51 FR 9773 (March 21 1986) (adopting amendments to Rule 2a-7 under the 1940 Act) Investment Company Act Release No 17452 (April 23 1990) 55 FR 17933 (April 30 1990) (adopting Rule 144A under the Securities Act of 1933)
32 The NAV of the Fundrsquos Shares generally will be calculated once daily Monday through Friday as of the close of regular trading on the New York Stock Exchange generally 400 pm Eastern Time (the ldquoNAV Calculation Timerdquo) NAV per Share will be calculated by dividing the Fundrsquos net assets by the number of Fund Shares outstanding For more information regarding the valuation of Fund investments in calculating the Fundrsquos NAV see the Registration Statement
SR-NASDAQ-2015-011 Amendment No 2 Page 45 of 64
such instruments (the ldquoCreation Basketrdquo) In addition if there is a difference between the
NAV attributable to a Creation Unit and the market value of the Creation Basket
exchanged for the Creation Unit the party conveying instruments with the lower value
will pay to the other an amount in cash equal to the difference (referred to as the ldquoCash
Componentrdquo)
Creations and redemptions must be made by or through an Authorized Participant
that has executed an agreement that has been agreed to by the Distributor and BNY with
respect to creations and redemptions of Creation Units All standard orders to create
Creation Units must be received by the transfer agent no later than the closing time of the
regular trading session on the New York Stock Exchange (ordinarily 400 pm Eastern
Time) (the ldquoClosing Timerdquo) in each case on the date such order is placed in order for the
creation of Creation Units to be effected based on the NAV of Shares as next determined
on such date after receipt of the order in proper form Shares may be redeemed only in
Creation Units at their NAV next determined after receipt not later than the Closing Time
of a redemption request in proper form by the Fund through the transfer agent and only
on a business day
The Fundrsquos custodian through the National Securities Clearing Corporation will
make available on each business day prior to the opening of business of the Exchange
the list of the names and quantities of the instruments comprising the Creation Basket as
well as the estimated Cash Component (if any) for that day The published Creation
Basket will apply until a new Creation Basket is announced on the following business
day prior to commencement of trading in the Shares
SR-NASDAQ-2015-011 Amendment No 2 Page 46 of 64
Net Asset Value
The Fundrsquos NAV will be determined as of the close of trading (normally
400 pm Eastern Time) on each day the New York Stock Exchange is open for
business NAV will be calculated for the Fund by taking the market price of the Fundrsquos
total assets including interest or dividends accrued but not yet collected less all
liabilities and dividing such amount by the total number of Shares outstanding The
result rounded to the nearest cent will be the NAV per Share All valuations will be
subject to review by the Board of Trustees of the Trust (ldquoTrust Boardrdquo) or its delegate
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with valuation procedures (which may be revised from time to time) adopted by the Trust
Board (the ldquoValuation Proceduresrdquo) and in accordance with the 1940 Act A market
valuation generally means a valuation (i) obtained from an exchange an independent
pricing service (ldquoPricing Servicerdquo) or a major market maker (or dealer) or (ii) based on a
price quotation or other equivalent indication of value supplied by an exchange a Pricing
Service or a major market maker (or dealer) The information summarized below is
based on the Valuation Procedures as currently in effect however as noted above the
Valuation Procedures are amended from time to time and therefore such information is
subject to change
Certain securities including Floating Rate Debt Instruments in which the Fund
may invest will not be listed on any securities exchange or board of trade Such
securities will typically be bought and sold by institutional investors in individually
negotiated private transactions that function in many respects like an over-the-counter
SR-NASDAQ-2015-011 Amendment No 2 Page 47 of 64
secondary market although typically no formal market makers will exist Certain
securities particularly debt securities will have few or no trades or trade infrequently
and information regarding a specific security may not be widely available or may be
incomplete Accordingly determinations of the fair value of debt securities may be
based on infrequent and dated information Because there is less reliable objective data
available elements of judgment may play a greater role in valuation of debt securities
than for other types of securities Typically Floating Rate Debt Instruments and other
debt securities in which the Fund may invest (other than those described below) will be
valued using information provided by a Pricing Service Debt securities having a
remaining maturity of 60 days or less when purchased will be valued at cost adjusted for
amortization of premiums and accretion of discounts provided the Adviserrsquos pricing
committee (the ldquoPricing Committeerdquo) has determined that the use of amortized cost is an
appropriate reflection of fair value given market and issuer-specific conditions existing at
the time of the determination Overnight repurchase agreements will be valued at cost
and term repurchase agreements (ie those whose maturity exceeds seven days) will be
valued at the average of the bid quotations obtained daily from at least two recognized
dealers
Asset-backed and mortgage-backed securities will generally be valued by using a
Pricing Service If a Pricing Service does not cover a particular asset-backed or
mortgage-backed security or discontinues covering a particular asset-backed or
mortgage-backed security the security will be priced using broker quotes generally
provided by brokers that make or participate in markets in the security To derive values
Pricing Services and broker-dealers may use matrix pricing and valuation models as well
SR-NASDAQ-2015-011 Amendment No 2 Page 48 of 64
as recent market transactions for the same or similar assets As it deems appropriate the
Pricing Committee may determine that a Pricing Service price does not represent an
accurate value of an asset-backed or mortgage-backed security based on broker quotes it
receives a recent trade in the security by the Fund information from a portfolio manager
or other market information In the event that the Pricing Committee determines that the
Pricing Service price is unreliable or inaccurate based on such other information broker
quotes may be used Additionally if the Pricing Committee determines that the price of
an asset-backed or mortgage-backed security obtained from a Pricing Service and
available broker quotes is unreliable or inaccurate due to market conditions or other
reasons or if a Pricing Service price or broker quote is unavailable the security will be
valued using fair value pricing as described below
Equity securities listed on any exchange other than the Exchange will be valued at
the last sale price on the exchange on which they are principally traded on the business
day as of which such value is being determined Equity securities listed on the Exchange
will be valued at the official closing price on the business day as of which such value is
being determined If there has been no sale on such day or no official closing price in
the case of securities traded on the Exchange the securities will be valued using fair
value pricing as described below Equity securities traded on more than one securities
exchange will be valued at the last sale price or official closing price as applicable on
the business day as of which such value is being determined at the close of the exchange
representing the principal market for such securities
Exchange-traded options and futures contracts will be valued at the closing price
in the market where such contracts are principally traded
SR-NASDAQ-2015-011 Amendment No 2 Page 49 of 64
Certain securities including Floating Rate Debt Instruments in which the Fund
will invest will not be able to be priced by pre-established pricing methods Such
securities may be valued by the Trust Board or its delegate at fair value The use of fair
value pricing by the Fund will be governed by the Valuation Procedures and conducted in
accordance with the provisions of the 1940 Act Valuing the Fundrsquos securities using fair
value pricing will result in using prices for those securities that may differ from current
market valuations or official closing prices on the applicable exchange
Availability of Information
The Fundrsquos website (wwwftportfolioscom) which will be publicly available
prior to the public offering of Shares will include a form of the prospectus for the Fund
that may be downloaded The website will include the Sharesrsquo ticker CUSIP and
exchange information along with additional quantitative information updated on a daily
basis including for the Fund (1) daily trading volume the prior business dayrsquos reported
NAV and closing price mid-point of the bidask spread at the time of calculation of such
NAV (the ldquoBidAsk Pricerdquo)33 and a calculation of the premium and discount of the
BidAsk Price against the NAV and (2) data in chart format displaying the frequency
distribution of discounts and premiums of the daily BidAsk Price against the NAV
within appropriate ranges for each of the four previous calendar quarters On each
business day before commencement of trading in Shares in the Regular Market Session34
33 The BidAsk Price of the Fund will be determined using the mid-point of the highest bid and the lowest offer on the Exchange as of the time of calculation of the Fundrsquos NAV The records relating to BidAsk Prices will be retained by the Fund and its service providers
34 See Nasdaq Rule 4120(b)(4) (describing the three trading sessions on the Exchange (1) Pre-Market Session from 4 am to 930 am Eastern Time (2)
SR-NASDAQ-2015-011 Amendment No 2 Page 50 of 64
on the Exchange the Fund will disclose on its website the identities and quantities of the
portfolio of securities and other assets (the ldquoDisclosed Portfoliordquo as defined in Nasdaq
Rule 5735(c)(2)) held by the Fund that will form the basis for the Fundrsquos calculation of
NAV at the end of the business day 35 The Fundrsquos disclosure of derivative positions in
the Disclosed Portfolio will include information that market participants can use to value
these positions intraday On a daily basis the Fund will disclose on the Fundrsquos website
the following information regarding each portfolio holding as applicable to the type of
holding ticker symbol CUSIP number or other identifier if any a description of the
holding (including the type of holding) the identity of the security or other asset or
instrument underlying the holding if any for options the option strike price quantity
held (as measured by for example par value notional value or number of shares
contracts or units) maturity date if any coupon rate if any effective date if any market
value of the holding and percentage weighting of the holding in the Fundrsquos portfolio
The website information will be publicly available at no charge
In addition for the Fund an estimated value defined in Rule 5735(c)(3) as the
ldquoIntraday Indicative Valuerdquo that reflects an estimated intraday value of the Fundrsquos
Disclosed Portfolio will be disseminated Moreover the Intraday Indicative Value
Regular Market Session from 930 am to 4 pm or 415 pm Eastern Time and (3) Post-Market Session from 4 pm or 415 pm to 8 pm Eastern Time)
Under accounting procedures to be followed by the Fund trades made on the prior business day (ldquoTrdquo) will be booked and reflected in NAV on the current business day (ldquoT+1rdquo) Accordingly the Fund will be able to disclose at the beginning of the business day the portfolio that will form the basis for the NAV calculation at the end of the business day
35
SR-NASDAQ-2015-011 Amendment No 2 Page 51 of 64
available on the NASDAQ OMX Information LLC proprietary index data service36 will
be based upon the current value for the components of the Disclosed Portfolio and will be
updated and widely disseminated by one or more major market data vendors and broadly
displayed at least every 15 seconds during the Regular Market Session The Intraday
Indicative Value will be based on quotes and closing prices from the securitiesrsquo local
market and may not reflect events that occur subsequent to the local marketrsquos close
Premiums and discounts between the Intraday Indicative Value and the market price may
occur This should not be viewed as a ldquoreal timerdquo update of the NAV per Share of the
Fund which is calculated only once a day
The dissemination of the Intraday Indicative Value together with the Disclosed
Portfolio will allow investors to determine the value of the underlying portfolio of the
Fund on a daily basis and will provide a close estimate of that value throughout the
trading day
Investors will also be able to obtain the Fundrsquos Statement of Additional
Information (ldquoSAIrdquo) the Fundrsquos annual and semi-annual reports (together ldquoShareholder
Reportsrdquo) and its Form N-CSR and Form N-SAR filed twice a year The Fundrsquos SAI
and Shareholder Reports will be available free upon request from the Fund and those
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or
downloaded from the Commissionrsquos website at wwwsecgov Information regarding
Currently the NASDAQ OMX Global Index Data Service (ldquoGIDSrdquo) is the NASDAQ OMX global index data feed service offering real-time updates daily summary messages and access to widely followed indexes and Intraday Indicative Values for ETFs GIDS provides investment professionals with the daily information needed to track or trade NASDAQ OMX indexes listed ETFs or third-party partner indexes and ETFs
36
SR-NASDAQ-2015-011 Amendment No 2 Page 52 of 64
market price and trading volume of the Shares will be continually available on a real-time
basis throughout the day on brokersrsquo computer screens and other electronic services
Information regarding the previous dayrsquos closing price and trading volume information
for the Shares will be published daily in the financial section of newspapers Quotation
and last sale information for the Shares will be available via Nasdaq proprietary quote
and trade services as well as in accordance with the Unlisted Trading Privileges and the
Consolidated Tape Association (ldquoCTArdquo) plans for the Shares Quotation and last sale
information for the other ETFs in which the Fund will invest will be available via the
quote and trade services of their respective primary exchanges as well as in accordance
with the Unlisted Trading Privileges and the CTA plans as applicable Quotation and
last sale information for US exchange-traded options will be available via the Options
Price Reporting Authority Intraday executable price quotations on Floating Rate Debt
Instruments and other assets not traded on an exchange will be available from major
broker-dealer firms or market data vendors as well as from automated quotation systems
published or other public sources or online information services Additionally the Trade
Reporting and Compliance Engine (ldquoTRACErdquo) of the Financial Industry Regulatory
Authority (ldquoFINRArdquo) will be a source of price information for corporate bonds
privately-issued securities mortgage-backed securities and asset-backed securities to the
extent transactions in such securities are reported to TRACE37 For exchange-traded
Broker-dealers that are FINRA member firms have an obligation to report transactions in specified debt securities to TRACE to the extent required under applicable FINRA rules Generally such debt securities will have at issuance a maturity that exceeds one calendar year
37
SR-NASDAQ-2015-011 Amendment No 2 Page 53 of 64
assets intraday pricing information will be available directly from the applicable listing
exchange
Additional information regarding the Fund and the Shares including investment
strategies risks creation and redemption procedures fees Fund holdings disclosure
policies distributions and taxes will be included in the Registration Statement
Initial and Continued Listing
The Shares will be subject to Rule 5735 which sets forth the initial and continued
listing criteria applicable to Managed Fund Shares The Exchange represents that for
initial andor continued listing the Fund must be in compliance with Rule 10A-338 under
the Act A minimum of 100000 Shares will be outstanding at the commencement of
trading on the Exchange The Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the NAV and the
Disclosed Portfolio will be made available to all market participants at the same time
Trading Halts
With respect to trading halts the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading in the Shares of the Fund Nasdaq will
halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12) Trading may be
halted because of market conditions or for reasons that in the view of the Exchange
make trading in the Shares inadvisable These may include (1) the extent to which
trading is not occurring in the securities andor the other assets constituting the Disclosed
Portfolio of the Fund or (2) whether other unusual conditions or circumstances
See 17 CFR 24010A-3 38
SR-NASDAQ-2015-011 Amendment No 2 Page 54 of 64
detrimental to the maintenance of a fair and orderly market are present Trading in the
Shares also will be subject to Rule 5735(d)(2)(D) which sets forth circumstances under
which Shares of the Fund may be halted
Trading Rules
Nasdaq deems the Shares to be equity securities thus rendering trading in the
Shares subject to Nasdaqrsquos existing rules governing the trading of equity securities
Nasdaq will allow trading in the Shares from 400 am until 800 pm Eastern Time
The Exchange has appropriate rules to facilitate transactions in the Shares during all
trading sessions As provided in Nasdaq Rule 5735(b)(3) the minimum price variation
for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $001
Surveillance
The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws39 The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities laws
The surveillances referred to above generally focus on detecting securities trading
outside their normal patterns which could be indicative of manipulative or other violative
activity When such situations are detected surveillance analysis follows and
FINRA surveils trading on the Exchange pursuant to a regulatory services agreement The Exchange is responsible for FINRArsquos performance under this regulatory services agreement
39
SR-NASDAQ-2015-011 Amendment No 2 Page 55 of 64
investigations are opened where appropriate to review the behavior of all relevant
parties for all relevant trading violations
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 56 of 64
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
SR-NASDAQ-2015-011 Amendment No 2 Page 57 of 64
2 Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
SR-NASDAQ-2015-011 Amendment No 2 Page 58 of 64
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
SR-NASDAQ-2015-011 Amendment No 2 Page 59 of 64
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
SR-NASDAQ-2015-011 Amendment No 2 Page 60 of 64
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 61 of 64
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
SR-NASDAQ-2015-011 Amendment No 2 Page 62 of 64
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
B Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
C Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received From Members Participants or Others
Written comments were neither solicited nor received
III Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Within 45 days of the date of publication of this notice in the Federal Register or
within such longer period (i) as the Commission may designate up to 90 days of such date
if it finds such longer period to be appropriate and publishes its reasons for so finding or
(ii) as to which the Exchange consents the Commission shall (a) by order approve or
disapprove such proposed rule change or (b) institute proceedings to determine whether
the proposed rule change should be disapproved
SR-NASDAQ-2015-011 Amendment No 2 Page 63 of 64
IV Solicitation of Comments
Interested persons are invited to submit written data views and arguments
concerning the foregoing including whether the proposed rule change is consistent with
the Act Comments may be submitted by any of the following methods
Electronic comments
bull Use the Commissionrsquos Internet comment form
(httpwwwsecgovrulessroshtml) or
bull Send an e-mail to rule-commentssecgov Please include File Number
SR-NASDAQ-2015-011 on the subject line
Paper comments
bull Send paper comments in triplicate to Brent J Fields Secretary Securities and
Exchange Commission Station Place 100 F Street NE Washington DC
20549-9303
All submissions should refer to File Number SR-NASDAQ-2015-011 This file number
should be included on the subject line if e-mail is used To help the Commission process
and review your comments more efficiently please use only one method The
Commission will post all comments on the Commissionrsquos Internet website
httpwwwsecgovrulessroshtml
Copies of the submission all subsequent amendments all written statements with
respect to the proposed rule change that are filed with the Commission and all written
communications relating to the proposed rule change between the Commission and any
person other than those that may be withheld from the public in accordance with the
provisions of 5 USC 552 will be available for website viewing and printing in the
Commissionrsquos Public Reference Room 100 F Street NE Washington DC 20549 on
SR-NASDAQ-2015-011 Amendment No 2 Page 64 of 64
official business days between the hours of 1000 am and 300 pm Copies of the filing
also will be available for inspection and copying at the principal office of Nasdaq All
comments received will be posted without change the Commission does not edit
personal identifying information from submissions You should submit only information
that you wish to make available publicly
All submissions should refer to File Number SR-NASDAQ-2015-011 and should
be submitted on or before [insert date 21 days from publication in the Federal Register]
For the Commission by the Division of Trading and Markets pursuant to
delegated authority41
Kevin M OrsquoNeill Deputy Secretary
17 CFR 20030-3(a)(12) 41
SR-NASDAQ-2015-011 Amendment No 2 Page 19 of 64
on the Exchange the Fund will disclose on its website the identities and quantities of the
portfolio of securities and other assets (the ldquoDisclosed Portfoliordquo as defined in Nasdaq
Rule 5735(c)(2)) held by the Fund that will form the basis for the Fundrsquos calculation of
NAV at the end of the business day 35 The Fundrsquos disclosure of derivative positions in
the Disclosed Portfolio will include information that market participants can use to value
these positions intraday On a daily basis the Fund will disclose on the Fundrsquos website
the following information regarding each portfolio holding as applicable to the type of
holding ticker symbol CUSIP number or other identifier if any a description of the
holding (including the type of holding) the identity of the security or other asset or
instrument underlying the holding if any for options the option strike price quantity
held (as measured by for example par value notional value or number of shares
contracts or units) maturity date if any coupon rate if any effective date if any market
value of the holding and percentage weighting of the holding in the Fundrsquos portfolio
The website information will be publicly available at no charge
In addition for the Fund an estimated value defined in Rule 5735(c)(3) as the
ldquoIntraday Indicative Valuerdquo that reflects an estimated intraday value of the Fundrsquos
Disclosed Portfolio will be disseminated Moreover the Intraday Indicative Value
Regular Market Session from 930 am to 4 pm or 415 pm Eastern Time and (3) Post-Market Session from 4 pm or 415 pm to 8 pm Eastern Time)
Under accounting procedures to be followed by the Fund trades made on the prior business day (ldquoTrdquo) will be booked and reflected in NAV on the current business day (ldquoT+1rdquo) Accordingly the Fund will be able to disclose at the beginning of the business day the portfolio that will form the basis for the NAV calculation at the end of the business day
35
SR-NASDAQ-2015-011 Amendment No 2 Page 20 of 64
available on the NASDAQ OMX Information LLC proprietary index data service36 will
be based upon the current value for the components of the Disclosed Portfolio and will be
updated and widely disseminated by one or more major market data vendors and broadly
displayed at least every 15 seconds during the Regular Market Session The Intraday
Indicative Value will be based on quotes and closing prices from the securitiesrsquo local
market and may not reflect events that occur subsequent to the local marketrsquos close
Premiums and discounts between the Intraday Indicative Value and the market price may
occur This should not be viewed as a ldquoreal timerdquo update of the NAV per Share of the
Fund which is calculated only once a day
The dissemination of the Intraday Indicative Value together with the Disclosed
Portfolio will allow investors to determine the value of the underlying portfolio of the
Fund on a daily basis and will provide a close estimate of that value throughout the
trading day
Investors will also be able to obtain the Fundrsquos Statement of Additional
Information (ldquoSAIrdquo) the Fundrsquos annual and semi-annual reports (together ldquoShareholder
Reportsrdquo) and its Form N-CSR and Form N-SAR filed twice a year The Fundrsquos SAI
and Shareholder Reports will be available free upon request from the Fund and those
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or
downloaded from the Commissionrsquos website at wwwsecgov Information regarding
market price and trading volume of the Shares will be continually available on a real-time
Currently the NASDAQ OMX Global Index Data Service (ldquoGIDSrdquo) is the NASDAQ OMX global index data feed service offering real-time updates daily summary messages and access to widely followed indexes and Intraday Indicative Values for ETFs GIDS provides investment professionals with the daily information needed to track or trade NASDAQ OMX indexes listed ETFs or third-party partner indexes and ETFs
36
SR-NASDAQ-2015-011 Amendment No 2 Page 21 of 64
basis throughout the day on brokersrsquo computer screens and other electronic services
Information regarding the previous dayrsquos closing price and trading volume information
for the Shares will be published daily in the financial section of newspapers Quotation
and last sale information for the Shares will be available via Nasdaq proprietary quote
and trade services as well as in accordance with the Unlisted Trading Privileges and the
Consolidated Tape Association (ldquoCTArdquo) plans for the Shares Quotation and last sale
information for the other ETFs in which the Fund will invest will be available via the
quote and trade services of their respective primary exchanges as well as in accordance
with the Unlisted Trading Privileges and the CTA plans as applicable Quotation and
last sale information for US exchange-traded options will be available via the Options
Price Reporting Authority Intraday executable price quotations on Floating Rate Debt
Instruments and other assets not traded on an exchange will be available from major
broker-dealer firms or market data vendors as well as from automated quotation systems
published or other public sources or online information services Additionally the Trade
Reporting and Compliance Engine (ldquoTRACErdquo) of the Financial Industry Regulatory
Authority (ldquoFINRArdquo) will be a source of price information for corporate bonds
privately-issued securities mortgage-backed securities and asset-backed securities to the
extent transactions in such securities are reported to TRACE37 For exchange-traded
assets intraday pricing information will be available directly from the applicable listing
exchange
Broker-dealers that are FINRA member firms have an obligation to report transactions in specified debt securities to TRACE to the extent required under applicable FINRA rules Generally such debt securities will have at issuance a maturity that exceeds one calendar year
37
SR-NASDAQ-2015-011 Amendment No 2 Page 22 of 64
Additional information regarding the Fund and the Shares including investment
strategies risks creation and redemption procedures fees Fund holdings disclosure
policies distributions and taxes will be included in the Registration Statement
Initial and Continued Listing
The Shares will be subject to Rule 5735 which sets forth the initial and continued
listing criteria applicable to Managed Fund Shares The Exchange represents that for
initial andor continued listing the Fund must be in compliance with Rule 10A-338 under
the Act A minimum of 100000 Shares will be outstanding at the commencement of
trading on the Exchange The Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the NAV and the
Disclosed Portfolio will be made available to all market participants at the same time
Trading Halts
With respect to trading halts the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading in the Shares of the Fund Nasdaq will
halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12) Trading may be
halted because of market conditions or for reasons that in the view of the Exchange
make trading in the Shares inadvisable These may include (1) the extent to which
trading is not occurring in the securities andor the other assets constituting the Disclosed
Portfolio of the Fund or (2) whether other unusual conditions or circumstances
detrimental to the maintenance of a fair and orderly market are present Trading in the
See 17 CFR 24010A-3 38
SR-NASDAQ-2015-011 Amendment No 2 Page 23 of 64
Shares also will be subject to Rule 5735(d)(2)(D) which sets forth circumstances under
which Shares of the Fund may be halted
Trading Rules
Nasdaq deems the Shares to be equity securities thus rendering trading in the
Shares subject to Nasdaqrsquos existing rules governing the trading of equity securities
Nasdaq will allow trading in the Shares from 400 am until 800 pm Eastern Time
The Exchange has appropriate rules to facilitate transactions in the Shares during all
trading sessions As provided in Nasdaq Rule 5735(b)(3) the minimum price variation
for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $001
Surveillance
The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws39 The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities laws
The surveillances referred to above generally focus on detecting securities trading
outside their normal patterns which could be indicative of manipulative or other violative
activity When such situations are detected surveillance analysis follows and
investigations are opened where appropriate to review the behavior of all relevant
parties for all relevant trading violations
FINRA surveils trading on the Exchange pursuant to a regulatory services agreement The Exchange is responsible for FINRArsquos performance under this regulatory services agreement
39
SR-NASDAQ-2015-011 Amendment No 2 Page 24 of 64
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 25 of 64
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
b Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
SR-NASDAQ-2015-011 Amendment No 2 Page 26 of 64
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
SR-NASDAQ-2015-011 Amendment No 2 Page 27 of 64
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
SR-NASDAQ-2015-011 Amendment No 2 Page 28 of 64
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
SR-NASDAQ-2015-011 Amendment No 2 Page 29 of 64
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
SR-NASDAQ-2015-011 Amendment No 2 Page 30 of 64
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
SR-NASDAQ-2015-011 Amendment No 2 Page 31 of 64
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
4 Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
5 Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received from Members Participants or Others
Written comments were neither solicited nor received
6 Extension of Time Period for Commission Action
The Exchange does not consent at this time to an extension of any time period for
Commission action
7 Basis for Summary Effectiveness Pursuant to Section 19(b)(3) or for Accelerated Effectiveness Pursuant to Section 19(b)(2)
Not applicable
8 Proposed Rule Change Based on Rules of Another Self-Regulatory Organization or of the Commission
Not applicable
9 Security-Based Swap Submissions Filed Pursuant to Section 3C of the Act
Not applicable
SR-NASDAQ-2015-011 Amendment No 2 Page 32 of 64
10 Advance Notices Filed Pursuant to Section 806(e) of the Payment Clearing and Settlement Supervision Act
Not applicable
11 Exhibits
1 Completed notice of proposed rule change for publication in the Federal
Register
SR-NASDAQ-2015-011 Amendment No 2 Page 33 of 64
EXHIBIT 1
SECURITIES AND EXCHANGE COMMISSION (Release No 34shy File No SR-NASDAQ-2015-011)
April __ 2015
Self-Regulatory Organizations The NASDAQ Stock Market LLC Notice of Filing of Proposed Rule Change Relating to the Listing and Trading of the Shares of the First Trust Strategic Floating Rate ETF of First Trust Exchange-Traded Fund IV
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (ldquoActrdquo)1 and
Rule 19b-4 thereunder2 notice is hereby given that on February 12 2015 The NASDAQ
Stock Market LLC (ldquoNasdaqrdquo or the ldquoExchangerdquo) filed with the Securities and Exchange
Commission (ldquoCommissionrdquo) the proposed rule change as described in in Items I II and
III below which Items have been prepared by Nasdaq On April 6 2015 Nasdaq filed
Amendment No 1 which replaced the text of the original filing in its entirety On April
15 2015 Nasdaq filed Amendment No 2 which replaced the text of the original filing in
its entirety The Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons
I Self-Regulatory Organizationrsquos Statement of the Terms of Substance of the Proposed Rule Change
Nasdaq proposes to list and trade the shares of the First Trust Strategic Floating
Rate ETF (the ldquoFundrdquo) of the First Trust Strategic Floating Rate ETF (the ldquoFundrdquo) of
First Trust Exchange-Traded Fund IV (the ldquoTrustrdquo) under Nasdaq Rule 5735 (ldquoManaged
1 15 USC 78s(b)(1)
2 17 CFR 24019b-4
SR-NASDAQ-2015-011 Amendment No 2 Page 34 of 64
Fund Sharesrdquo)3 The shares of the Fund are collectively referred to herein as the
ldquoSharesrdquo
The text of the proposed rule change is available at
httpnasdaqcchwallstreetcom at Nasdaqrsquos principal office and at the Commissionrsquos
Public Reference Room
II Self-Regulatory Organizationrsquos Statement of the Purpose of and Statutory Basis for the Proposed Rule Change
In its filing with the Commission Nasdaq included statements concerning the
purpose of and basis for the proposed rule change The text of these statements may be
examined at the places specified in Item IV below Nasdaq has prepared summaries set
forth in Sections A B and C below of the most significant aspects of such statements
A Self-Regulatory Organizationrsquos Statement of the Purpose of and Statutory Basis for the Proposed Rule Change
1 Purpose
The Exchange proposes to list and trade the Shares of the Fund under Nasdaq
Rule 5735 which governs the listing and trading of Managed Fund Shares4 on the
3 The Commission approved Nasdaq Rule 5735 in Securities Exchange Act Release No 57962 (June 13 2008) 73 FR 35175 (June 20 2008) (SR-NASDAQ-2008shy039) There are already multiple actively-managed funds listed on the Exchange see eg Securities Exchange Act Release Nos 69464 (April 26 2013) 78 FR 25774 (May 2 2013) (SR-NASDAQ-2013-036) (order approving listing and trading of First Trust Senior Loan Fund) 68972 (February 22 2013) 78 FR 13721 (February 28 2013) (SR-NASDAQ-2012-147) (order approving listing and trading of First Trust High Yield LongShort ETF) 66489 (February 29 2012) 77 FR 13379 (March 6 2012) (SR-NASDAQ-2012-004) (order approving listing and trading of WisdomTree Emerging Markets Corporate Bond Fund) The Exchange believes the proposed rule change raises no significant issues not previously addressed in those prior Commission orders
4 A Managed Fund Share is a security that represents an interest in an investment company registered under the Investment Company Act of 1940 (15 USC 80ashy
SR-NASDAQ-2015-011 Amendment No 2 Page 35 of 64
Exchange The Fund will be an actively-managed exchange-traded fund (ldquoETFrdquo) The
Shares will be offered by the Trust which was established as a Massachusetts business
trust on September 15 20105 The Trust is registered with the Commission as an
investment company and has filed a registration statement on Form N-1A (ldquoRegistration
Statementrdquo) with the Commission6 The Fund will be a series of the Trust The Fund
intends to qualify each year as a regulated investment company (ldquoRICrdquo) under
Subchapter M of the Internal Revenue Code of 1986 as amended
First Trust Advisors LP will be the investment adviser (ldquoAdviserrdquo) to the Fund
First Trust Portfolios LP (the ldquoDistributorrdquo) will be the principal underwriter and
distributor of the Fundrsquos Shares The Bank of New York Mellon Corporation (ldquoBNYrdquo)
will act as the administrator accounting agent custodian and transfer agent to the Fund
1) (the ldquo1940 Actrdquo) organized as an open-end investment company or similar entity that invests in a portfolio of securities selected by its investment adviser consistent with its investment objectives and policies In contrast an open-end investment company that issues Index Fund Shares listed and traded on the Exchange under Nasdaq Rule 5705 seeks to provide investment results that correspond generally to the price and yield performance of a specific foreign or domestic stock index fixed income securities index or combination thereof
5 The Commission has issued an order upon which the Trust may rely granting certain exemptive relief under the 1940 Act See Investment Company Act Release No 30029 (April 10 2012) (File No 812-13795) (the ldquoExemptive Reliefrdquo) In addition the Commission has issued no-action relief upon which the Trust may rely pertaining to the Fundrsquos ability to invest in derivatives notwithstanding certain representations in the application for the Exemptive Relief See Commission No-Action Letter (December 6 2012)
6 See Post-Effective Amendment No 104 to Registration Statement on Form N-1A for the Trust dated January 29 2015 (File Nos 333-174332 and 811-22559) The descriptions of the Fund and the Shares contained herein are based in part on information in the Registration Statement
7
SR-NASDAQ-2015-011 Amendment No 2 Page 36 of 64
Paragraph (g) of Rule 5735 provides that if the investment adviser to the
investment company issuing Managed Fund Shares is affiliated with a broker-dealer
such investment adviser shall erect a ldquofire wallrdquo between the investment adviser and the
broker-dealer with respect to access to information concerning the composition andor
changes to such investment company portfolio7 In addition paragraph (g) further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio Rule 5735(g) is similar
to Nasdaq Rule 5705(b)(5)(A)(i) however paragraph (g) in connection with the
establishment of a ldquofire wallrdquo between the investment adviser and the broker-dealer
reflects the applicable open-end fundrsquos portfolio not an underlying benchmark index as
is the case with index-based funds The Adviser is not a broker-dealer although it is
affiliated with the Distributor a broker-dealer The Adviser has implemented a fire wall
An investment adviser to an open-end fund is required to be registered under the Investment Advisers Act of 1940 (the ldquoAdvisers Actrdquo) As a result the Adviser and its related personnel are subject to the provisions of Rule 204A-1 under the Advisers Act relating to codes of ethics This Rule requires investment advisers to adopt a code of ethics that reflects the fiduciary nature of the relationship to clients as well as compliance with other applicable securities laws Accordingly procedures designed to prevent the communication and misuse of non-public information by an investment adviser must be consistent with Rule 204A-1 under the Advisers Act In addition Rule 206(4)-7 under the Advisers Act makes it unlawful for an investment adviser to provide investment advice to clients unless such investment adviser has (i) adopted and implemented written policies and procedures reasonably designed to prevent violation by the investment adviser and its supervised persons of the Advisers Act and the Commission rules adopted thereunder (ii) implemented at a minimum an annual review regarding the adequacy of the policies and procedures established pursuant to subparagraph (i) above and the effectiveness of their implementation and (iii) designated an individual (who is a supervised person) responsible for administering the policies and procedures adopted under subparagraph (i) above
8
SR-NASDAQ-2015-011 Amendment No 2 Page 37 of 64
with respect to its broker-dealer affiliate regarding access to information concerning the
composition andor changes to the portfolio In addition personnel who make decisions
on the Fundrsquos portfolio composition will be subject to procedures designed to prevent the
use and dissemination of material non-public information regarding the Fundrsquos portfolio
In the event (a) the Adviser becomes or becomes newly affiliated with a broker-dealer
or (b) any new adviser or sub-adviser is a registered broker-dealer or becomes affiliated
with another broker-dealer it will implement a fire wall with respect to its relevant
personnel andor such broker-dealer affiliate as applicable regarding access to
information concerning the composition andor changes to the portfolio and will be
subject to procedures designed to prevent the use and dissemination of material
non-public information regarding such portfolio The Fund does not currently intend to
use a sub-adviser
First Trust Strategic Floating Rate ETF
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions8 at least 80 of its
The term ldquounder normal market conditionsrdquo as used herein includes but is not limited to the absence of adverse market economic political or other conditions including extreme volatility or trading halts in the fixed income markets or the financial markets generally operational issues causing dissemination of inaccurate market information or force majeure type events such as systems failure natural or man-made disaster act of God armed conflict act of terrorism riot or labor disruption or any similar intervening circumstance For temporary defensive purposes during the initial invest-up period and during periods of high cash inflows or outflows the Fund may depart from its principal investment strategies for example it may hold a higher than normal proportion of its assets in cash During such periods the Fund may not be able to achieve its investment objective The Fund may adopt a defensive strategy when the Adviser believes securities in which the Fund normally invests have elevated risks due to political or economic factors and in other extraordinary circumstances
SR-NASDAQ-2015-011 Amendment No 2 Page 38 of 64
net assets in a portfolio of the following types of floating-rate9 debt instruments issued by
US and non-US public- and private-sector entities floating-rate corporate10 and
government bonds and notes floating-rate agency securities 11 floating-rate instruments
of non-US issuers floating-rate privately-issued securities 12 floating-rate asset-backed
securities 13 floating-rate mortgage-backed securities14 floating-rate loans 15 and
9 For the avoidance of doubt the term ldquofloating-raterdquo shall also include similar terms such as ldquovariable-raterdquo and ldquoadjustable-raterdquo
10 The Adviser expects that under normal market conditions generally for a corporate bond to be considered as an eligible investment after taking into account such an investment at least 75 of the Fundrsquos net assets that are invested in floating-rate corporate bonds and as described below fixed-rate corporate bonds (in the aggregate) will be comprised of corporate bonds that have at the time of original issuance $100 million or more par amount outstanding
11 ldquoAgency securitiesrdquo for these purposes generally includes securities issued by the following entities Government National Mortgage Association (Ginnie Mae) Federal National Mortgage Association (Fannie Mae) Federal Home Loan Banks (FHLBanks) Federal Home Loan Mortgage Corporation (Freddie Mac) Farm Credit System (FCS) Farm Credit Banks (FCBanks) Student Loan Marketing Association (Sallie Mae) Resolution Funding Corporation (REFCORP) Financing Corporation (FICO) and the Farm Credit System (FCS) Financial Assistance Corporation (FAC) Agency securities can include but are not limited to mortgage-backed securities
12 ldquoPrivately-issued securitiesrdquo for these purposes generally includes Rule 144A securities other than mortgage-backed Rule 144A securities Under normal market conditions privately-issued securities will have at the time of original issuance $100 million or more principal amount outstanding to be considered eligible investments
13 Asset-backed securities are securities that are backed by a pool of assets The Fund currently intends to invest in asset-backed securities that are consumer asset-backed securities
14 Mortgage-backed securities which are securities that directly or indirectly represent a participation in or are secured by and payable from mortgage loans on real property will consist of (1) residential mortgage-backed securities (ldquoRMBSrdquo) (2) commercial mortgage-backed securities (ldquoCMBSrdquo) (3) stripped mortgage-backed securities (ldquoSMBSrdquo) which are mortgage-backed securities
SR-NASDAQ-2015-011 Amendment No 2 Page 39 of 64
investment companies16 (including investment companies advised by the Adviser) that
invest primarily in the foregoing types of debt instruments17 (collectively ldquoFloating Rate
Debt Instrumentsrdquo)
where mortgage payments are divided between paying the loanrsquos principal and paying the loanrsquos interest (4) collateralized mortgage obligations (ldquoCMOsrdquo) and real estate mortgage investment conduits (ldquoREMICsrdquo) which are mortgage-backed securities that are divided into multiple classes with each class being entitled to a different share of the principal and interest payments received from the pool of underlying assets
15 The floating-rate loans in which the Fund will invest will represent amounts borrowed by companies or other entities from banks and other lenders and a significant portion of such floating-rate loans may be rated below investment grade or unrated Floating-rate loans held by the Fund may be senior or subordinate obligations of the borrower and may or may not be secured by collateral First lien senior secured floating-rate loans are referred to herein as ldquosenior loansrdquo Floating-rate loans that are not senior loans (ie unsecured floating-rate loans and secured floating-rate loans that are not first lien floating-rate loans) are referred to herein as ldquojunior loansrdquo The Fund will generally invest in floating-rate loans that the Adviser deems to be liquid with readily available prices notwithstanding the foregoing the Fund may invest in floating-rate loans that are deemed illiquid so long as the Fund complies with the 15 limitation on investments of its net assets in illiquid assets described below under ldquoInvestment Restrictionsrdquo
16 The Fund currently anticipates investing only in registered open-end investment companies that are listed and traded in the US on registered exchanges (ie other ETFs) An ETF is an investment company registered under the 1940 Act that holds a portfolio of securities Many ETFs are designed to track the performance of a securities index including industry sector country and region indexes The Fund may invest in the securities of ETFs in excess of the limits imposed under the 1940 Act pursuant to exemptive orders obtained by other ETFs and their sponsors from the Commission In addition the Fund may invest in the securities of certain investment companies in excess of the limits imposed under the 1940 Act pursuant to an exemptive order obtained by the Trust and the Adviser from the Commission See Investment Company Act Release No 30377 (February 5 2013) (File No 812-13895) The ETFs in which the Fund may invest include Index Fund Shares (as described in Nasdaq Rule 5705) Portfolio Depository Receipts (as described in Nasdaq Rule 5705) and Managed Fund Shares (as described in Nasdaq Rule 5735) While the Fund may invest in inverse ETFs the Fund will not invest in leveraged or inverse leveraged (eg 2X or -3X) ETFs
SR-NASDAQ-2015-011 Amendment No 2 Page 40 of 64
At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade To be considered
ldquoinvestment graderdquo under normal market conditions rated Floating Rate Debt
Instruments will carry at the time of purchase a rating in the highest four rating
categories of at least one nationally recognized statistical ratings organization
(ldquoNRSROrdquo) (eg BBB- or higher by Standard amp Poorrsquos Ratings Services (ldquoSampPrdquo)
andor Fitch Ratings (ldquoFitchrdquo) or Baa3 or higher by Moodyrsquos Investors Service Inc
(ldquoMoodyrsquosrdquo)18 For unrated securities to be considered ldquoinvestment graderdquo under normal
market conditions such securities will be determined at the time of purchase to be of
comparable quality19 by the Adviser The Fund may invest up to 35 of its net assets in
securities that are at the time of investment rated below investment grade by each
NRSRO rating such securities (or securities that are unrated and determined by the
17 The liquidity of a security especially in the case of asset-backed and mortgage-backed securities will be a substantial factor in the Fundrsquos security selection process Consistent with the discussion below under ldquoInvestment Restrictionsrdquo the Fund will not purchase any Floating Rate Debt Instruments (including asset-backed securities and mortgage-backed securities) that in the Adviserrsquos opinion are illiquid if as a result more than 15 of the value of the Fundrsquos net assets will be invested in illiquid assets
18 For the avoidance of doubt if a security is rated by multiple NRSROs and receives different ratings the Fund will treat the security as being rated in the highest rating category received from an NRSRO
19 Comparable quality of unrated securities will be determined by the Adviser based on fundamental credit analysis of the unrated security and comparable NRSRO-rated securities On a best efforts basis the Adviser will attempt to make a rating determination based on publicly available data In making a ldquocomparable qualityrdquo determination the Adviser may consider for example whether the issuer of the security has issued other rated securities the nature and provisions of the relevant security whether the obligations under the relevant security are guaranteed by another entity and the rating of such guarantor (if any) relevant cash flows macroeconomic analysis andor sector or industry analysis
SR-NASDAQ-2015-011 Amendment No 2 Page 41 of 64
Adviser to be of comparable quality) commonly referred to as ldquohigh yieldrdquo or ldquojunkrdquo
bonds If subsequent to purchase by the Fund a security held by the Fund experiences a
decline in credit quality and falls below investment grade the Fund may continue to hold
the security and it will not cause the Fund to violate the 35 investment limitation
however the security will be taken into account for purposes of determining whether
purchases of additional securities will cause the Fund to violate such limitation
The Fund will limit its investments in asset-backed securities (excluding agency
mortgage-backed securities) and non-agency mortgage-backed securities (in the
aggregate) to 20 of its net assets20 In addition the Fund will limit its investments in
junior loans to 20 of its net assets
The Fund will hold debt securities (including in the aggregate Floating Rate
Debt Instruments and the fixed-rate debt securities described below) of at least 13
non-affiliated issuers
Other Investments
Under normal market conditions the Fund will invest primarily in the Floating
Rate Debt Instruments described above to meet its investment objective In addition the
Fund may invest up to 20 of its net assets in the following types of fixed-rate debt
securities corporate21 and government bonds and notes agency securities22 instruments
20 For the avoidance of doubt there is no limitation on the Fundrsquos investments in agency mortgage-backed securities
21 See footnote 10 above
22 See footnote 11 above
SR-NASDAQ-2015-011 Amendment No 2 Page 42 of 64
of non-US issuers in developed markets privately-issued securities 23 asset-backed
securities 24 mortgage-backed securities 25 municipal bonds money market securities26
and investment companies27 (including investment companies advised by the Adviser)
that invest primarily in the foregoing types of debt securities
Further to pursue its investment objective the Fund may invest up to 20 of the
value of its net assets in exchange-listed options on US Treasury futures contracts and
exchange-listed US Treasury futures contracts28 The use of these derivative
transactions may allow the Fund to obtain net long or short exposures to selected interest
rates These derivatives may also be used to hedge risks including interest rate risks and
credit risks associated with the Fundrsquos portfolio investments The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
23 See footnote 12 above
24 See footnote 13 above
25 See footnote 14 above
26 ldquoMoney market securitiesrdquo for these purposes generally includes short-term high-quality obligations issued or guaranteed by the US Treasury or the agencies or instrumentalities of the US government short-term high-quality securities issued or guaranteed by non-US governments agencies and instrumentalities repurchase agreements commercial paper (both asset-backed and non-assetshybacked) and deposits and other obligations of US and non-US banks and financial institutions
27 See footnote 16 above
28 At least 90 of the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be invested in instruments that trade in markets that are members of the Intermarket Surveillance Group (ldquoISGrdquo) (see footnote 40 below) or are parties to a comprehensive surveillance sharing agreement with the Exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 43 of 64
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index
Investment Restrictions
The Fund will not invest 25 or more of the value of its total assets in securities
of issuers in any one industry This restriction does not apply to (a) obligations issued or
guaranteed by the US government its agencies or instrumentalities or (b) securities of
other investment companies29
The Fund may hold up to an aggregate amount of 15 of its net assets in illiquid
assets (calculated at the time of investment) including Rule 144A securities deemed
illiquid by the Adviser30 The Fund will monitor its portfolio liquidity on an ongoing
basis to determine whether in light of current circumstances an adequate level of
liquidity is being maintained and will consider taking appropriate steps in order to
maintain adequate liquidity if through a change in values net assets or other
circumstances more than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid
assets include securities subject to contractual or other restrictions on resale and other
29 See Form N-1A Item 9 The Commission has taken the position that a fund is concentrated if it invests more than 25 of the value of its total assets in any one industry See eg Investment Company Act Release No 9011 (October 30 1975) 40 FR 54241 (November 21 1975)
30 In reaching liquidity decisions the Adviser may consider the following factors the frequency of trades and quotes for the security the number of dealers wishing to purchase or sell the security and the number of other potential purchasers dealer undertakings to make a market in the security and the nature of the security and the nature of the marketplace in which it trades (eg the time needed to dispose of the security the method of soliciting offers and the mechanics of transfer)
SR-NASDAQ-2015-011 Amendment No 2 Page 44 of 64
instruments that lack readily available markets as determined in accordance with
Commission staff guidance31
The Fund will not invest in non-US equity securities
Creation and Redemption of Shares
The Fund will issue and redeem Shares on a continuous basis at net asset value
(ldquoNAVrdquo)32 only in large blocks of Shares (ldquoCreation Unitsrdquo) in transactions with
authorized participants generally including broker-dealers and large institutional
investors (ldquoAuthorized Participantsrdquo) Creation Units generally will consist of 50000
Shares although this may change from time to time Creation Units however are not
expected to consist of less than 50000 Shares As described in the Registration
Statement and consistent with the Exemptive Relief the Fund will issue and redeem
Creation Units in exchange for an in-kind portfolio of instruments andor cash in lieu of
31 The Commission has stated that long-standing Commission guidelines have required open-end funds to hold no more than 15 of their net assets in illiquid securities and other illiquid assets See Investment Company Act Release No 28193 (March 11 2008) 73 FR 14618 (March 18 2008) footnote 34 See also Investment Company Act Release No 5847 (October 21 1969) 35 FR 19989 (December 31 1970) (Statement Regarding ldquoRestricted Securitiesrdquo) Investment Company Act Release No 18612 (March 12 1992) 57 FR 9828 (March 20 1992) (Revisions of Guidelines to Form N-1A) A fundrsquos portfolio security is illiquid if it cannot be disposed of in the ordinary course of business within seven days at approximately the value ascribed to it by the fund See Investment Company Act Release No 14983 (March 12 1986) 51 FR 9773 (March 21 1986) (adopting amendments to Rule 2a-7 under the 1940 Act) Investment Company Act Release No 17452 (April 23 1990) 55 FR 17933 (April 30 1990) (adopting Rule 144A under the Securities Act of 1933)
32 The NAV of the Fundrsquos Shares generally will be calculated once daily Monday through Friday as of the close of regular trading on the New York Stock Exchange generally 400 pm Eastern Time (the ldquoNAV Calculation Timerdquo) NAV per Share will be calculated by dividing the Fundrsquos net assets by the number of Fund Shares outstanding For more information regarding the valuation of Fund investments in calculating the Fundrsquos NAV see the Registration Statement
SR-NASDAQ-2015-011 Amendment No 2 Page 45 of 64
such instruments (the ldquoCreation Basketrdquo) In addition if there is a difference between the
NAV attributable to a Creation Unit and the market value of the Creation Basket
exchanged for the Creation Unit the party conveying instruments with the lower value
will pay to the other an amount in cash equal to the difference (referred to as the ldquoCash
Componentrdquo)
Creations and redemptions must be made by or through an Authorized Participant
that has executed an agreement that has been agreed to by the Distributor and BNY with
respect to creations and redemptions of Creation Units All standard orders to create
Creation Units must be received by the transfer agent no later than the closing time of the
regular trading session on the New York Stock Exchange (ordinarily 400 pm Eastern
Time) (the ldquoClosing Timerdquo) in each case on the date such order is placed in order for the
creation of Creation Units to be effected based on the NAV of Shares as next determined
on such date after receipt of the order in proper form Shares may be redeemed only in
Creation Units at their NAV next determined after receipt not later than the Closing Time
of a redemption request in proper form by the Fund through the transfer agent and only
on a business day
The Fundrsquos custodian through the National Securities Clearing Corporation will
make available on each business day prior to the opening of business of the Exchange
the list of the names and quantities of the instruments comprising the Creation Basket as
well as the estimated Cash Component (if any) for that day The published Creation
Basket will apply until a new Creation Basket is announced on the following business
day prior to commencement of trading in the Shares
SR-NASDAQ-2015-011 Amendment No 2 Page 46 of 64
Net Asset Value
The Fundrsquos NAV will be determined as of the close of trading (normally
400 pm Eastern Time) on each day the New York Stock Exchange is open for
business NAV will be calculated for the Fund by taking the market price of the Fundrsquos
total assets including interest or dividends accrued but not yet collected less all
liabilities and dividing such amount by the total number of Shares outstanding The
result rounded to the nearest cent will be the NAV per Share All valuations will be
subject to review by the Board of Trustees of the Trust (ldquoTrust Boardrdquo) or its delegate
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with valuation procedures (which may be revised from time to time) adopted by the Trust
Board (the ldquoValuation Proceduresrdquo) and in accordance with the 1940 Act A market
valuation generally means a valuation (i) obtained from an exchange an independent
pricing service (ldquoPricing Servicerdquo) or a major market maker (or dealer) or (ii) based on a
price quotation or other equivalent indication of value supplied by an exchange a Pricing
Service or a major market maker (or dealer) The information summarized below is
based on the Valuation Procedures as currently in effect however as noted above the
Valuation Procedures are amended from time to time and therefore such information is
subject to change
Certain securities including Floating Rate Debt Instruments in which the Fund
may invest will not be listed on any securities exchange or board of trade Such
securities will typically be bought and sold by institutional investors in individually
negotiated private transactions that function in many respects like an over-the-counter
SR-NASDAQ-2015-011 Amendment No 2 Page 47 of 64
secondary market although typically no formal market makers will exist Certain
securities particularly debt securities will have few or no trades or trade infrequently
and information regarding a specific security may not be widely available or may be
incomplete Accordingly determinations of the fair value of debt securities may be
based on infrequent and dated information Because there is less reliable objective data
available elements of judgment may play a greater role in valuation of debt securities
than for other types of securities Typically Floating Rate Debt Instruments and other
debt securities in which the Fund may invest (other than those described below) will be
valued using information provided by a Pricing Service Debt securities having a
remaining maturity of 60 days or less when purchased will be valued at cost adjusted for
amortization of premiums and accretion of discounts provided the Adviserrsquos pricing
committee (the ldquoPricing Committeerdquo) has determined that the use of amortized cost is an
appropriate reflection of fair value given market and issuer-specific conditions existing at
the time of the determination Overnight repurchase agreements will be valued at cost
and term repurchase agreements (ie those whose maturity exceeds seven days) will be
valued at the average of the bid quotations obtained daily from at least two recognized
dealers
Asset-backed and mortgage-backed securities will generally be valued by using a
Pricing Service If a Pricing Service does not cover a particular asset-backed or
mortgage-backed security or discontinues covering a particular asset-backed or
mortgage-backed security the security will be priced using broker quotes generally
provided by brokers that make or participate in markets in the security To derive values
Pricing Services and broker-dealers may use matrix pricing and valuation models as well
SR-NASDAQ-2015-011 Amendment No 2 Page 48 of 64
as recent market transactions for the same or similar assets As it deems appropriate the
Pricing Committee may determine that a Pricing Service price does not represent an
accurate value of an asset-backed or mortgage-backed security based on broker quotes it
receives a recent trade in the security by the Fund information from a portfolio manager
or other market information In the event that the Pricing Committee determines that the
Pricing Service price is unreliable or inaccurate based on such other information broker
quotes may be used Additionally if the Pricing Committee determines that the price of
an asset-backed or mortgage-backed security obtained from a Pricing Service and
available broker quotes is unreliable or inaccurate due to market conditions or other
reasons or if a Pricing Service price or broker quote is unavailable the security will be
valued using fair value pricing as described below
Equity securities listed on any exchange other than the Exchange will be valued at
the last sale price on the exchange on which they are principally traded on the business
day as of which such value is being determined Equity securities listed on the Exchange
will be valued at the official closing price on the business day as of which such value is
being determined If there has been no sale on such day or no official closing price in
the case of securities traded on the Exchange the securities will be valued using fair
value pricing as described below Equity securities traded on more than one securities
exchange will be valued at the last sale price or official closing price as applicable on
the business day as of which such value is being determined at the close of the exchange
representing the principal market for such securities
Exchange-traded options and futures contracts will be valued at the closing price
in the market where such contracts are principally traded
SR-NASDAQ-2015-011 Amendment No 2 Page 49 of 64
Certain securities including Floating Rate Debt Instruments in which the Fund
will invest will not be able to be priced by pre-established pricing methods Such
securities may be valued by the Trust Board or its delegate at fair value The use of fair
value pricing by the Fund will be governed by the Valuation Procedures and conducted in
accordance with the provisions of the 1940 Act Valuing the Fundrsquos securities using fair
value pricing will result in using prices for those securities that may differ from current
market valuations or official closing prices on the applicable exchange
Availability of Information
The Fundrsquos website (wwwftportfolioscom) which will be publicly available
prior to the public offering of Shares will include a form of the prospectus for the Fund
that may be downloaded The website will include the Sharesrsquo ticker CUSIP and
exchange information along with additional quantitative information updated on a daily
basis including for the Fund (1) daily trading volume the prior business dayrsquos reported
NAV and closing price mid-point of the bidask spread at the time of calculation of such
NAV (the ldquoBidAsk Pricerdquo)33 and a calculation of the premium and discount of the
BidAsk Price against the NAV and (2) data in chart format displaying the frequency
distribution of discounts and premiums of the daily BidAsk Price against the NAV
within appropriate ranges for each of the four previous calendar quarters On each
business day before commencement of trading in Shares in the Regular Market Session34
33 The BidAsk Price of the Fund will be determined using the mid-point of the highest bid and the lowest offer on the Exchange as of the time of calculation of the Fundrsquos NAV The records relating to BidAsk Prices will be retained by the Fund and its service providers
34 See Nasdaq Rule 4120(b)(4) (describing the three trading sessions on the Exchange (1) Pre-Market Session from 4 am to 930 am Eastern Time (2)
SR-NASDAQ-2015-011 Amendment No 2 Page 50 of 64
on the Exchange the Fund will disclose on its website the identities and quantities of the
portfolio of securities and other assets (the ldquoDisclosed Portfoliordquo as defined in Nasdaq
Rule 5735(c)(2)) held by the Fund that will form the basis for the Fundrsquos calculation of
NAV at the end of the business day 35 The Fundrsquos disclosure of derivative positions in
the Disclosed Portfolio will include information that market participants can use to value
these positions intraday On a daily basis the Fund will disclose on the Fundrsquos website
the following information regarding each portfolio holding as applicable to the type of
holding ticker symbol CUSIP number or other identifier if any a description of the
holding (including the type of holding) the identity of the security or other asset or
instrument underlying the holding if any for options the option strike price quantity
held (as measured by for example par value notional value or number of shares
contracts or units) maturity date if any coupon rate if any effective date if any market
value of the holding and percentage weighting of the holding in the Fundrsquos portfolio
The website information will be publicly available at no charge
In addition for the Fund an estimated value defined in Rule 5735(c)(3) as the
ldquoIntraday Indicative Valuerdquo that reflects an estimated intraday value of the Fundrsquos
Disclosed Portfolio will be disseminated Moreover the Intraday Indicative Value
Regular Market Session from 930 am to 4 pm or 415 pm Eastern Time and (3) Post-Market Session from 4 pm or 415 pm to 8 pm Eastern Time)
Under accounting procedures to be followed by the Fund trades made on the prior business day (ldquoTrdquo) will be booked and reflected in NAV on the current business day (ldquoT+1rdquo) Accordingly the Fund will be able to disclose at the beginning of the business day the portfolio that will form the basis for the NAV calculation at the end of the business day
35
SR-NASDAQ-2015-011 Amendment No 2 Page 51 of 64
available on the NASDAQ OMX Information LLC proprietary index data service36 will
be based upon the current value for the components of the Disclosed Portfolio and will be
updated and widely disseminated by one or more major market data vendors and broadly
displayed at least every 15 seconds during the Regular Market Session The Intraday
Indicative Value will be based on quotes and closing prices from the securitiesrsquo local
market and may not reflect events that occur subsequent to the local marketrsquos close
Premiums and discounts between the Intraday Indicative Value and the market price may
occur This should not be viewed as a ldquoreal timerdquo update of the NAV per Share of the
Fund which is calculated only once a day
The dissemination of the Intraday Indicative Value together with the Disclosed
Portfolio will allow investors to determine the value of the underlying portfolio of the
Fund on a daily basis and will provide a close estimate of that value throughout the
trading day
Investors will also be able to obtain the Fundrsquos Statement of Additional
Information (ldquoSAIrdquo) the Fundrsquos annual and semi-annual reports (together ldquoShareholder
Reportsrdquo) and its Form N-CSR and Form N-SAR filed twice a year The Fundrsquos SAI
and Shareholder Reports will be available free upon request from the Fund and those
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or
downloaded from the Commissionrsquos website at wwwsecgov Information regarding
Currently the NASDAQ OMX Global Index Data Service (ldquoGIDSrdquo) is the NASDAQ OMX global index data feed service offering real-time updates daily summary messages and access to widely followed indexes and Intraday Indicative Values for ETFs GIDS provides investment professionals with the daily information needed to track or trade NASDAQ OMX indexes listed ETFs or third-party partner indexes and ETFs
36
SR-NASDAQ-2015-011 Amendment No 2 Page 52 of 64
market price and trading volume of the Shares will be continually available on a real-time
basis throughout the day on brokersrsquo computer screens and other electronic services
Information regarding the previous dayrsquos closing price and trading volume information
for the Shares will be published daily in the financial section of newspapers Quotation
and last sale information for the Shares will be available via Nasdaq proprietary quote
and trade services as well as in accordance with the Unlisted Trading Privileges and the
Consolidated Tape Association (ldquoCTArdquo) plans for the Shares Quotation and last sale
information for the other ETFs in which the Fund will invest will be available via the
quote and trade services of their respective primary exchanges as well as in accordance
with the Unlisted Trading Privileges and the CTA plans as applicable Quotation and
last sale information for US exchange-traded options will be available via the Options
Price Reporting Authority Intraday executable price quotations on Floating Rate Debt
Instruments and other assets not traded on an exchange will be available from major
broker-dealer firms or market data vendors as well as from automated quotation systems
published or other public sources or online information services Additionally the Trade
Reporting and Compliance Engine (ldquoTRACErdquo) of the Financial Industry Regulatory
Authority (ldquoFINRArdquo) will be a source of price information for corporate bonds
privately-issued securities mortgage-backed securities and asset-backed securities to the
extent transactions in such securities are reported to TRACE37 For exchange-traded
Broker-dealers that are FINRA member firms have an obligation to report transactions in specified debt securities to TRACE to the extent required under applicable FINRA rules Generally such debt securities will have at issuance a maturity that exceeds one calendar year
37
SR-NASDAQ-2015-011 Amendment No 2 Page 53 of 64
assets intraday pricing information will be available directly from the applicable listing
exchange
Additional information regarding the Fund and the Shares including investment
strategies risks creation and redemption procedures fees Fund holdings disclosure
policies distributions and taxes will be included in the Registration Statement
Initial and Continued Listing
The Shares will be subject to Rule 5735 which sets forth the initial and continued
listing criteria applicable to Managed Fund Shares The Exchange represents that for
initial andor continued listing the Fund must be in compliance with Rule 10A-338 under
the Act A minimum of 100000 Shares will be outstanding at the commencement of
trading on the Exchange The Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the NAV and the
Disclosed Portfolio will be made available to all market participants at the same time
Trading Halts
With respect to trading halts the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading in the Shares of the Fund Nasdaq will
halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12) Trading may be
halted because of market conditions or for reasons that in the view of the Exchange
make trading in the Shares inadvisable These may include (1) the extent to which
trading is not occurring in the securities andor the other assets constituting the Disclosed
Portfolio of the Fund or (2) whether other unusual conditions or circumstances
See 17 CFR 24010A-3 38
SR-NASDAQ-2015-011 Amendment No 2 Page 54 of 64
detrimental to the maintenance of a fair and orderly market are present Trading in the
Shares also will be subject to Rule 5735(d)(2)(D) which sets forth circumstances under
which Shares of the Fund may be halted
Trading Rules
Nasdaq deems the Shares to be equity securities thus rendering trading in the
Shares subject to Nasdaqrsquos existing rules governing the trading of equity securities
Nasdaq will allow trading in the Shares from 400 am until 800 pm Eastern Time
The Exchange has appropriate rules to facilitate transactions in the Shares during all
trading sessions As provided in Nasdaq Rule 5735(b)(3) the minimum price variation
for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $001
Surveillance
The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws39 The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities laws
The surveillances referred to above generally focus on detecting securities trading
outside their normal patterns which could be indicative of manipulative or other violative
activity When such situations are detected surveillance analysis follows and
FINRA surveils trading on the Exchange pursuant to a regulatory services agreement The Exchange is responsible for FINRArsquos performance under this regulatory services agreement
39
SR-NASDAQ-2015-011 Amendment No 2 Page 55 of 64
investigations are opened where appropriate to review the behavior of all relevant
parties for all relevant trading violations
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 56 of 64
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
SR-NASDAQ-2015-011 Amendment No 2 Page 57 of 64
2 Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
SR-NASDAQ-2015-011 Amendment No 2 Page 58 of 64
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
SR-NASDAQ-2015-011 Amendment No 2 Page 59 of 64
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
SR-NASDAQ-2015-011 Amendment No 2 Page 60 of 64
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 61 of 64
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
SR-NASDAQ-2015-011 Amendment No 2 Page 62 of 64
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
B Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
C Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received From Members Participants or Others
Written comments were neither solicited nor received
III Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Within 45 days of the date of publication of this notice in the Federal Register or
within such longer period (i) as the Commission may designate up to 90 days of such date
if it finds such longer period to be appropriate and publishes its reasons for so finding or
(ii) as to which the Exchange consents the Commission shall (a) by order approve or
disapprove such proposed rule change or (b) institute proceedings to determine whether
the proposed rule change should be disapproved
SR-NASDAQ-2015-011 Amendment No 2 Page 63 of 64
IV Solicitation of Comments
Interested persons are invited to submit written data views and arguments
concerning the foregoing including whether the proposed rule change is consistent with
the Act Comments may be submitted by any of the following methods
Electronic comments
bull Use the Commissionrsquos Internet comment form
(httpwwwsecgovrulessroshtml) or
bull Send an e-mail to rule-commentssecgov Please include File Number
SR-NASDAQ-2015-011 on the subject line
Paper comments
bull Send paper comments in triplicate to Brent J Fields Secretary Securities and
Exchange Commission Station Place 100 F Street NE Washington DC
20549-9303
All submissions should refer to File Number SR-NASDAQ-2015-011 This file number
should be included on the subject line if e-mail is used To help the Commission process
and review your comments more efficiently please use only one method The
Commission will post all comments on the Commissionrsquos Internet website
httpwwwsecgovrulessroshtml
Copies of the submission all subsequent amendments all written statements with
respect to the proposed rule change that are filed with the Commission and all written
communications relating to the proposed rule change between the Commission and any
person other than those that may be withheld from the public in accordance with the
provisions of 5 USC 552 will be available for website viewing and printing in the
Commissionrsquos Public Reference Room 100 F Street NE Washington DC 20549 on
SR-NASDAQ-2015-011 Amendment No 2 Page 64 of 64
official business days between the hours of 1000 am and 300 pm Copies of the filing
also will be available for inspection and copying at the principal office of Nasdaq All
comments received will be posted without change the Commission does not edit
personal identifying information from submissions You should submit only information
that you wish to make available publicly
All submissions should refer to File Number SR-NASDAQ-2015-011 and should
be submitted on or before [insert date 21 days from publication in the Federal Register]
For the Commission by the Division of Trading and Markets pursuant to
delegated authority41
Kevin M OrsquoNeill Deputy Secretary
17 CFR 20030-3(a)(12) 41
SR-NASDAQ-2015-011 Amendment No 2 Page 20 of 64
available on the NASDAQ OMX Information LLC proprietary index data service36 will
be based upon the current value for the components of the Disclosed Portfolio and will be
updated and widely disseminated by one or more major market data vendors and broadly
displayed at least every 15 seconds during the Regular Market Session The Intraday
Indicative Value will be based on quotes and closing prices from the securitiesrsquo local
market and may not reflect events that occur subsequent to the local marketrsquos close
Premiums and discounts between the Intraday Indicative Value and the market price may
occur This should not be viewed as a ldquoreal timerdquo update of the NAV per Share of the
Fund which is calculated only once a day
The dissemination of the Intraday Indicative Value together with the Disclosed
Portfolio will allow investors to determine the value of the underlying portfolio of the
Fund on a daily basis and will provide a close estimate of that value throughout the
trading day
Investors will also be able to obtain the Fundrsquos Statement of Additional
Information (ldquoSAIrdquo) the Fundrsquos annual and semi-annual reports (together ldquoShareholder
Reportsrdquo) and its Form N-CSR and Form N-SAR filed twice a year The Fundrsquos SAI
and Shareholder Reports will be available free upon request from the Fund and those
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or
downloaded from the Commissionrsquos website at wwwsecgov Information regarding
market price and trading volume of the Shares will be continually available on a real-time
Currently the NASDAQ OMX Global Index Data Service (ldquoGIDSrdquo) is the NASDAQ OMX global index data feed service offering real-time updates daily summary messages and access to widely followed indexes and Intraday Indicative Values for ETFs GIDS provides investment professionals with the daily information needed to track or trade NASDAQ OMX indexes listed ETFs or third-party partner indexes and ETFs
36
SR-NASDAQ-2015-011 Amendment No 2 Page 21 of 64
basis throughout the day on brokersrsquo computer screens and other electronic services
Information regarding the previous dayrsquos closing price and trading volume information
for the Shares will be published daily in the financial section of newspapers Quotation
and last sale information for the Shares will be available via Nasdaq proprietary quote
and trade services as well as in accordance with the Unlisted Trading Privileges and the
Consolidated Tape Association (ldquoCTArdquo) plans for the Shares Quotation and last sale
information for the other ETFs in which the Fund will invest will be available via the
quote and trade services of their respective primary exchanges as well as in accordance
with the Unlisted Trading Privileges and the CTA plans as applicable Quotation and
last sale information for US exchange-traded options will be available via the Options
Price Reporting Authority Intraday executable price quotations on Floating Rate Debt
Instruments and other assets not traded on an exchange will be available from major
broker-dealer firms or market data vendors as well as from automated quotation systems
published or other public sources or online information services Additionally the Trade
Reporting and Compliance Engine (ldquoTRACErdquo) of the Financial Industry Regulatory
Authority (ldquoFINRArdquo) will be a source of price information for corporate bonds
privately-issued securities mortgage-backed securities and asset-backed securities to the
extent transactions in such securities are reported to TRACE37 For exchange-traded
assets intraday pricing information will be available directly from the applicable listing
exchange
Broker-dealers that are FINRA member firms have an obligation to report transactions in specified debt securities to TRACE to the extent required under applicable FINRA rules Generally such debt securities will have at issuance a maturity that exceeds one calendar year
37
SR-NASDAQ-2015-011 Amendment No 2 Page 22 of 64
Additional information regarding the Fund and the Shares including investment
strategies risks creation and redemption procedures fees Fund holdings disclosure
policies distributions and taxes will be included in the Registration Statement
Initial and Continued Listing
The Shares will be subject to Rule 5735 which sets forth the initial and continued
listing criteria applicable to Managed Fund Shares The Exchange represents that for
initial andor continued listing the Fund must be in compliance with Rule 10A-338 under
the Act A minimum of 100000 Shares will be outstanding at the commencement of
trading on the Exchange The Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the NAV and the
Disclosed Portfolio will be made available to all market participants at the same time
Trading Halts
With respect to trading halts the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading in the Shares of the Fund Nasdaq will
halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12) Trading may be
halted because of market conditions or for reasons that in the view of the Exchange
make trading in the Shares inadvisable These may include (1) the extent to which
trading is not occurring in the securities andor the other assets constituting the Disclosed
Portfolio of the Fund or (2) whether other unusual conditions or circumstances
detrimental to the maintenance of a fair and orderly market are present Trading in the
See 17 CFR 24010A-3 38
SR-NASDAQ-2015-011 Amendment No 2 Page 23 of 64
Shares also will be subject to Rule 5735(d)(2)(D) which sets forth circumstances under
which Shares of the Fund may be halted
Trading Rules
Nasdaq deems the Shares to be equity securities thus rendering trading in the
Shares subject to Nasdaqrsquos existing rules governing the trading of equity securities
Nasdaq will allow trading in the Shares from 400 am until 800 pm Eastern Time
The Exchange has appropriate rules to facilitate transactions in the Shares during all
trading sessions As provided in Nasdaq Rule 5735(b)(3) the minimum price variation
for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $001
Surveillance
The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws39 The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities laws
The surveillances referred to above generally focus on detecting securities trading
outside their normal patterns which could be indicative of manipulative or other violative
activity When such situations are detected surveillance analysis follows and
investigations are opened where appropriate to review the behavior of all relevant
parties for all relevant trading violations
FINRA surveils trading on the Exchange pursuant to a regulatory services agreement The Exchange is responsible for FINRArsquos performance under this regulatory services agreement
39
SR-NASDAQ-2015-011 Amendment No 2 Page 24 of 64
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 25 of 64
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
b Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
SR-NASDAQ-2015-011 Amendment No 2 Page 26 of 64
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
SR-NASDAQ-2015-011 Amendment No 2 Page 27 of 64
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
SR-NASDAQ-2015-011 Amendment No 2 Page 28 of 64
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
SR-NASDAQ-2015-011 Amendment No 2 Page 29 of 64
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
SR-NASDAQ-2015-011 Amendment No 2 Page 30 of 64
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
SR-NASDAQ-2015-011 Amendment No 2 Page 31 of 64
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
4 Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
5 Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received from Members Participants or Others
Written comments were neither solicited nor received
6 Extension of Time Period for Commission Action
The Exchange does not consent at this time to an extension of any time period for
Commission action
7 Basis for Summary Effectiveness Pursuant to Section 19(b)(3) or for Accelerated Effectiveness Pursuant to Section 19(b)(2)
Not applicable
8 Proposed Rule Change Based on Rules of Another Self-Regulatory Organization or of the Commission
Not applicable
9 Security-Based Swap Submissions Filed Pursuant to Section 3C of the Act
Not applicable
SR-NASDAQ-2015-011 Amendment No 2 Page 32 of 64
10 Advance Notices Filed Pursuant to Section 806(e) of the Payment Clearing and Settlement Supervision Act
Not applicable
11 Exhibits
1 Completed notice of proposed rule change for publication in the Federal
Register
SR-NASDAQ-2015-011 Amendment No 2 Page 33 of 64
EXHIBIT 1
SECURITIES AND EXCHANGE COMMISSION (Release No 34shy File No SR-NASDAQ-2015-011)
April __ 2015
Self-Regulatory Organizations The NASDAQ Stock Market LLC Notice of Filing of Proposed Rule Change Relating to the Listing and Trading of the Shares of the First Trust Strategic Floating Rate ETF of First Trust Exchange-Traded Fund IV
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (ldquoActrdquo)1 and
Rule 19b-4 thereunder2 notice is hereby given that on February 12 2015 The NASDAQ
Stock Market LLC (ldquoNasdaqrdquo or the ldquoExchangerdquo) filed with the Securities and Exchange
Commission (ldquoCommissionrdquo) the proposed rule change as described in in Items I II and
III below which Items have been prepared by Nasdaq On April 6 2015 Nasdaq filed
Amendment No 1 which replaced the text of the original filing in its entirety On April
15 2015 Nasdaq filed Amendment No 2 which replaced the text of the original filing in
its entirety The Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons
I Self-Regulatory Organizationrsquos Statement of the Terms of Substance of the Proposed Rule Change
Nasdaq proposes to list and trade the shares of the First Trust Strategic Floating
Rate ETF (the ldquoFundrdquo) of the First Trust Strategic Floating Rate ETF (the ldquoFundrdquo) of
First Trust Exchange-Traded Fund IV (the ldquoTrustrdquo) under Nasdaq Rule 5735 (ldquoManaged
1 15 USC 78s(b)(1)
2 17 CFR 24019b-4
SR-NASDAQ-2015-011 Amendment No 2 Page 34 of 64
Fund Sharesrdquo)3 The shares of the Fund are collectively referred to herein as the
ldquoSharesrdquo
The text of the proposed rule change is available at
httpnasdaqcchwallstreetcom at Nasdaqrsquos principal office and at the Commissionrsquos
Public Reference Room
II Self-Regulatory Organizationrsquos Statement of the Purpose of and Statutory Basis for the Proposed Rule Change
In its filing with the Commission Nasdaq included statements concerning the
purpose of and basis for the proposed rule change The text of these statements may be
examined at the places specified in Item IV below Nasdaq has prepared summaries set
forth in Sections A B and C below of the most significant aspects of such statements
A Self-Regulatory Organizationrsquos Statement of the Purpose of and Statutory Basis for the Proposed Rule Change
1 Purpose
The Exchange proposes to list and trade the Shares of the Fund under Nasdaq
Rule 5735 which governs the listing and trading of Managed Fund Shares4 on the
3 The Commission approved Nasdaq Rule 5735 in Securities Exchange Act Release No 57962 (June 13 2008) 73 FR 35175 (June 20 2008) (SR-NASDAQ-2008shy039) There are already multiple actively-managed funds listed on the Exchange see eg Securities Exchange Act Release Nos 69464 (April 26 2013) 78 FR 25774 (May 2 2013) (SR-NASDAQ-2013-036) (order approving listing and trading of First Trust Senior Loan Fund) 68972 (February 22 2013) 78 FR 13721 (February 28 2013) (SR-NASDAQ-2012-147) (order approving listing and trading of First Trust High Yield LongShort ETF) 66489 (February 29 2012) 77 FR 13379 (March 6 2012) (SR-NASDAQ-2012-004) (order approving listing and trading of WisdomTree Emerging Markets Corporate Bond Fund) The Exchange believes the proposed rule change raises no significant issues not previously addressed in those prior Commission orders
4 A Managed Fund Share is a security that represents an interest in an investment company registered under the Investment Company Act of 1940 (15 USC 80ashy
SR-NASDAQ-2015-011 Amendment No 2 Page 35 of 64
Exchange The Fund will be an actively-managed exchange-traded fund (ldquoETFrdquo) The
Shares will be offered by the Trust which was established as a Massachusetts business
trust on September 15 20105 The Trust is registered with the Commission as an
investment company and has filed a registration statement on Form N-1A (ldquoRegistration
Statementrdquo) with the Commission6 The Fund will be a series of the Trust The Fund
intends to qualify each year as a regulated investment company (ldquoRICrdquo) under
Subchapter M of the Internal Revenue Code of 1986 as amended
First Trust Advisors LP will be the investment adviser (ldquoAdviserrdquo) to the Fund
First Trust Portfolios LP (the ldquoDistributorrdquo) will be the principal underwriter and
distributor of the Fundrsquos Shares The Bank of New York Mellon Corporation (ldquoBNYrdquo)
will act as the administrator accounting agent custodian and transfer agent to the Fund
1) (the ldquo1940 Actrdquo) organized as an open-end investment company or similar entity that invests in a portfolio of securities selected by its investment adviser consistent with its investment objectives and policies In contrast an open-end investment company that issues Index Fund Shares listed and traded on the Exchange under Nasdaq Rule 5705 seeks to provide investment results that correspond generally to the price and yield performance of a specific foreign or domestic stock index fixed income securities index or combination thereof
5 The Commission has issued an order upon which the Trust may rely granting certain exemptive relief under the 1940 Act See Investment Company Act Release No 30029 (April 10 2012) (File No 812-13795) (the ldquoExemptive Reliefrdquo) In addition the Commission has issued no-action relief upon which the Trust may rely pertaining to the Fundrsquos ability to invest in derivatives notwithstanding certain representations in the application for the Exemptive Relief See Commission No-Action Letter (December 6 2012)
6 See Post-Effective Amendment No 104 to Registration Statement on Form N-1A for the Trust dated January 29 2015 (File Nos 333-174332 and 811-22559) The descriptions of the Fund and the Shares contained herein are based in part on information in the Registration Statement
7
SR-NASDAQ-2015-011 Amendment No 2 Page 36 of 64
Paragraph (g) of Rule 5735 provides that if the investment adviser to the
investment company issuing Managed Fund Shares is affiliated with a broker-dealer
such investment adviser shall erect a ldquofire wallrdquo between the investment adviser and the
broker-dealer with respect to access to information concerning the composition andor
changes to such investment company portfolio7 In addition paragraph (g) further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio Rule 5735(g) is similar
to Nasdaq Rule 5705(b)(5)(A)(i) however paragraph (g) in connection with the
establishment of a ldquofire wallrdquo between the investment adviser and the broker-dealer
reflects the applicable open-end fundrsquos portfolio not an underlying benchmark index as
is the case with index-based funds The Adviser is not a broker-dealer although it is
affiliated with the Distributor a broker-dealer The Adviser has implemented a fire wall
An investment adviser to an open-end fund is required to be registered under the Investment Advisers Act of 1940 (the ldquoAdvisers Actrdquo) As a result the Adviser and its related personnel are subject to the provisions of Rule 204A-1 under the Advisers Act relating to codes of ethics This Rule requires investment advisers to adopt a code of ethics that reflects the fiduciary nature of the relationship to clients as well as compliance with other applicable securities laws Accordingly procedures designed to prevent the communication and misuse of non-public information by an investment adviser must be consistent with Rule 204A-1 under the Advisers Act In addition Rule 206(4)-7 under the Advisers Act makes it unlawful for an investment adviser to provide investment advice to clients unless such investment adviser has (i) adopted and implemented written policies and procedures reasonably designed to prevent violation by the investment adviser and its supervised persons of the Advisers Act and the Commission rules adopted thereunder (ii) implemented at a minimum an annual review regarding the adequacy of the policies and procedures established pursuant to subparagraph (i) above and the effectiveness of their implementation and (iii) designated an individual (who is a supervised person) responsible for administering the policies and procedures adopted under subparagraph (i) above
8
SR-NASDAQ-2015-011 Amendment No 2 Page 37 of 64
with respect to its broker-dealer affiliate regarding access to information concerning the
composition andor changes to the portfolio In addition personnel who make decisions
on the Fundrsquos portfolio composition will be subject to procedures designed to prevent the
use and dissemination of material non-public information regarding the Fundrsquos portfolio
In the event (a) the Adviser becomes or becomes newly affiliated with a broker-dealer
or (b) any new adviser or sub-adviser is a registered broker-dealer or becomes affiliated
with another broker-dealer it will implement a fire wall with respect to its relevant
personnel andor such broker-dealer affiliate as applicable regarding access to
information concerning the composition andor changes to the portfolio and will be
subject to procedures designed to prevent the use and dissemination of material
non-public information regarding such portfolio The Fund does not currently intend to
use a sub-adviser
First Trust Strategic Floating Rate ETF
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions8 at least 80 of its
The term ldquounder normal market conditionsrdquo as used herein includes but is not limited to the absence of adverse market economic political or other conditions including extreme volatility or trading halts in the fixed income markets or the financial markets generally operational issues causing dissemination of inaccurate market information or force majeure type events such as systems failure natural or man-made disaster act of God armed conflict act of terrorism riot or labor disruption or any similar intervening circumstance For temporary defensive purposes during the initial invest-up period and during periods of high cash inflows or outflows the Fund may depart from its principal investment strategies for example it may hold a higher than normal proportion of its assets in cash During such periods the Fund may not be able to achieve its investment objective The Fund may adopt a defensive strategy when the Adviser believes securities in which the Fund normally invests have elevated risks due to political or economic factors and in other extraordinary circumstances
SR-NASDAQ-2015-011 Amendment No 2 Page 38 of 64
net assets in a portfolio of the following types of floating-rate9 debt instruments issued by
US and non-US public- and private-sector entities floating-rate corporate10 and
government bonds and notes floating-rate agency securities 11 floating-rate instruments
of non-US issuers floating-rate privately-issued securities 12 floating-rate asset-backed
securities 13 floating-rate mortgage-backed securities14 floating-rate loans 15 and
9 For the avoidance of doubt the term ldquofloating-raterdquo shall also include similar terms such as ldquovariable-raterdquo and ldquoadjustable-raterdquo
10 The Adviser expects that under normal market conditions generally for a corporate bond to be considered as an eligible investment after taking into account such an investment at least 75 of the Fundrsquos net assets that are invested in floating-rate corporate bonds and as described below fixed-rate corporate bonds (in the aggregate) will be comprised of corporate bonds that have at the time of original issuance $100 million or more par amount outstanding
11 ldquoAgency securitiesrdquo for these purposes generally includes securities issued by the following entities Government National Mortgage Association (Ginnie Mae) Federal National Mortgage Association (Fannie Mae) Federal Home Loan Banks (FHLBanks) Federal Home Loan Mortgage Corporation (Freddie Mac) Farm Credit System (FCS) Farm Credit Banks (FCBanks) Student Loan Marketing Association (Sallie Mae) Resolution Funding Corporation (REFCORP) Financing Corporation (FICO) and the Farm Credit System (FCS) Financial Assistance Corporation (FAC) Agency securities can include but are not limited to mortgage-backed securities
12 ldquoPrivately-issued securitiesrdquo for these purposes generally includes Rule 144A securities other than mortgage-backed Rule 144A securities Under normal market conditions privately-issued securities will have at the time of original issuance $100 million or more principal amount outstanding to be considered eligible investments
13 Asset-backed securities are securities that are backed by a pool of assets The Fund currently intends to invest in asset-backed securities that are consumer asset-backed securities
14 Mortgage-backed securities which are securities that directly or indirectly represent a participation in or are secured by and payable from mortgage loans on real property will consist of (1) residential mortgage-backed securities (ldquoRMBSrdquo) (2) commercial mortgage-backed securities (ldquoCMBSrdquo) (3) stripped mortgage-backed securities (ldquoSMBSrdquo) which are mortgage-backed securities
SR-NASDAQ-2015-011 Amendment No 2 Page 39 of 64
investment companies16 (including investment companies advised by the Adviser) that
invest primarily in the foregoing types of debt instruments17 (collectively ldquoFloating Rate
Debt Instrumentsrdquo)
where mortgage payments are divided between paying the loanrsquos principal and paying the loanrsquos interest (4) collateralized mortgage obligations (ldquoCMOsrdquo) and real estate mortgage investment conduits (ldquoREMICsrdquo) which are mortgage-backed securities that are divided into multiple classes with each class being entitled to a different share of the principal and interest payments received from the pool of underlying assets
15 The floating-rate loans in which the Fund will invest will represent amounts borrowed by companies or other entities from banks and other lenders and a significant portion of such floating-rate loans may be rated below investment grade or unrated Floating-rate loans held by the Fund may be senior or subordinate obligations of the borrower and may or may not be secured by collateral First lien senior secured floating-rate loans are referred to herein as ldquosenior loansrdquo Floating-rate loans that are not senior loans (ie unsecured floating-rate loans and secured floating-rate loans that are not first lien floating-rate loans) are referred to herein as ldquojunior loansrdquo The Fund will generally invest in floating-rate loans that the Adviser deems to be liquid with readily available prices notwithstanding the foregoing the Fund may invest in floating-rate loans that are deemed illiquid so long as the Fund complies with the 15 limitation on investments of its net assets in illiquid assets described below under ldquoInvestment Restrictionsrdquo
16 The Fund currently anticipates investing only in registered open-end investment companies that are listed and traded in the US on registered exchanges (ie other ETFs) An ETF is an investment company registered under the 1940 Act that holds a portfolio of securities Many ETFs are designed to track the performance of a securities index including industry sector country and region indexes The Fund may invest in the securities of ETFs in excess of the limits imposed under the 1940 Act pursuant to exemptive orders obtained by other ETFs and their sponsors from the Commission In addition the Fund may invest in the securities of certain investment companies in excess of the limits imposed under the 1940 Act pursuant to an exemptive order obtained by the Trust and the Adviser from the Commission See Investment Company Act Release No 30377 (February 5 2013) (File No 812-13895) The ETFs in which the Fund may invest include Index Fund Shares (as described in Nasdaq Rule 5705) Portfolio Depository Receipts (as described in Nasdaq Rule 5705) and Managed Fund Shares (as described in Nasdaq Rule 5735) While the Fund may invest in inverse ETFs the Fund will not invest in leveraged or inverse leveraged (eg 2X or -3X) ETFs
SR-NASDAQ-2015-011 Amendment No 2 Page 40 of 64
At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade To be considered
ldquoinvestment graderdquo under normal market conditions rated Floating Rate Debt
Instruments will carry at the time of purchase a rating in the highest four rating
categories of at least one nationally recognized statistical ratings organization
(ldquoNRSROrdquo) (eg BBB- or higher by Standard amp Poorrsquos Ratings Services (ldquoSampPrdquo)
andor Fitch Ratings (ldquoFitchrdquo) or Baa3 or higher by Moodyrsquos Investors Service Inc
(ldquoMoodyrsquosrdquo)18 For unrated securities to be considered ldquoinvestment graderdquo under normal
market conditions such securities will be determined at the time of purchase to be of
comparable quality19 by the Adviser The Fund may invest up to 35 of its net assets in
securities that are at the time of investment rated below investment grade by each
NRSRO rating such securities (or securities that are unrated and determined by the
17 The liquidity of a security especially in the case of asset-backed and mortgage-backed securities will be a substantial factor in the Fundrsquos security selection process Consistent with the discussion below under ldquoInvestment Restrictionsrdquo the Fund will not purchase any Floating Rate Debt Instruments (including asset-backed securities and mortgage-backed securities) that in the Adviserrsquos opinion are illiquid if as a result more than 15 of the value of the Fundrsquos net assets will be invested in illiquid assets
18 For the avoidance of doubt if a security is rated by multiple NRSROs and receives different ratings the Fund will treat the security as being rated in the highest rating category received from an NRSRO
19 Comparable quality of unrated securities will be determined by the Adviser based on fundamental credit analysis of the unrated security and comparable NRSRO-rated securities On a best efforts basis the Adviser will attempt to make a rating determination based on publicly available data In making a ldquocomparable qualityrdquo determination the Adviser may consider for example whether the issuer of the security has issued other rated securities the nature and provisions of the relevant security whether the obligations under the relevant security are guaranteed by another entity and the rating of such guarantor (if any) relevant cash flows macroeconomic analysis andor sector or industry analysis
SR-NASDAQ-2015-011 Amendment No 2 Page 41 of 64
Adviser to be of comparable quality) commonly referred to as ldquohigh yieldrdquo or ldquojunkrdquo
bonds If subsequent to purchase by the Fund a security held by the Fund experiences a
decline in credit quality and falls below investment grade the Fund may continue to hold
the security and it will not cause the Fund to violate the 35 investment limitation
however the security will be taken into account for purposes of determining whether
purchases of additional securities will cause the Fund to violate such limitation
The Fund will limit its investments in asset-backed securities (excluding agency
mortgage-backed securities) and non-agency mortgage-backed securities (in the
aggregate) to 20 of its net assets20 In addition the Fund will limit its investments in
junior loans to 20 of its net assets
The Fund will hold debt securities (including in the aggregate Floating Rate
Debt Instruments and the fixed-rate debt securities described below) of at least 13
non-affiliated issuers
Other Investments
Under normal market conditions the Fund will invest primarily in the Floating
Rate Debt Instruments described above to meet its investment objective In addition the
Fund may invest up to 20 of its net assets in the following types of fixed-rate debt
securities corporate21 and government bonds and notes agency securities22 instruments
20 For the avoidance of doubt there is no limitation on the Fundrsquos investments in agency mortgage-backed securities
21 See footnote 10 above
22 See footnote 11 above
SR-NASDAQ-2015-011 Amendment No 2 Page 42 of 64
of non-US issuers in developed markets privately-issued securities 23 asset-backed
securities 24 mortgage-backed securities 25 municipal bonds money market securities26
and investment companies27 (including investment companies advised by the Adviser)
that invest primarily in the foregoing types of debt securities
Further to pursue its investment objective the Fund may invest up to 20 of the
value of its net assets in exchange-listed options on US Treasury futures contracts and
exchange-listed US Treasury futures contracts28 The use of these derivative
transactions may allow the Fund to obtain net long or short exposures to selected interest
rates These derivatives may also be used to hedge risks including interest rate risks and
credit risks associated with the Fundrsquos portfolio investments The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
23 See footnote 12 above
24 See footnote 13 above
25 See footnote 14 above
26 ldquoMoney market securitiesrdquo for these purposes generally includes short-term high-quality obligations issued or guaranteed by the US Treasury or the agencies or instrumentalities of the US government short-term high-quality securities issued or guaranteed by non-US governments agencies and instrumentalities repurchase agreements commercial paper (both asset-backed and non-assetshybacked) and deposits and other obligations of US and non-US banks and financial institutions
27 See footnote 16 above
28 At least 90 of the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be invested in instruments that trade in markets that are members of the Intermarket Surveillance Group (ldquoISGrdquo) (see footnote 40 below) or are parties to a comprehensive surveillance sharing agreement with the Exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 43 of 64
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index
Investment Restrictions
The Fund will not invest 25 or more of the value of its total assets in securities
of issuers in any one industry This restriction does not apply to (a) obligations issued or
guaranteed by the US government its agencies or instrumentalities or (b) securities of
other investment companies29
The Fund may hold up to an aggregate amount of 15 of its net assets in illiquid
assets (calculated at the time of investment) including Rule 144A securities deemed
illiquid by the Adviser30 The Fund will monitor its portfolio liquidity on an ongoing
basis to determine whether in light of current circumstances an adequate level of
liquidity is being maintained and will consider taking appropriate steps in order to
maintain adequate liquidity if through a change in values net assets or other
circumstances more than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid
assets include securities subject to contractual or other restrictions on resale and other
29 See Form N-1A Item 9 The Commission has taken the position that a fund is concentrated if it invests more than 25 of the value of its total assets in any one industry See eg Investment Company Act Release No 9011 (October 30 1975) 40 FR 54241 (November 21 1975)
30 In reaching liquidity decisions the Adviser may consider the following factors the frequency of trades and quotes for the security the number of dealers wishing to purchase or sell the security and the number of other potential purchasers dealer undertakings to make a market in the security and the nature of the security and the nature of the marketplace in which it trades (eg the time needed to dispose of the security the method of soliciting offers and the mechanics of transfer)
SR-NASDAQ-2015-011 Amendment No 2 Page 44 of 64
instruments that lack readily available markets as determined in accordance with
Commission staff guidance31
The Fund will not invest in non-US equity securities
Creation and Redemption of Shares
The Fund will issue and redeem Shares on a continuous basis at net asset value
(ldquoNAVrdquo)32 only in large blocks of Shares (ldquoCreation Unitsrdquo) in transactions with
authorized participants generally including broker-dealers and large institutional
investors (ldquoAuthorized Participantsrdquo) Creation Units generally will consist of 50000
Shares although this may change from time to time Creation Units however are not
expected to consist of less than 50000 Shares As described in the Registration
Statement and consistent with the Exemptive Relief the Fund will issue and redeem
Creation Units in exchange for an in-kind portfolio of instruments andor cash in lieu of
31 The Commission has stated that long-standing Commission guidelines have required open-end funds to hold no more than 15 of their net assets in illiquid securities and other illiquid assets See Investment Company Act Release No 28193 (March 11 2008) 73 FR 14618 (March 18 2008) footnote 34 See also Investment Company Act Release No 5847 (October 21 1969) 35 FR 19989 (December 31 1970) (Statement Regarding ldquoRestricted Securitiesrdquo) Investment Company Act Release No 18612 (March 12 1992) 57 FR 9828 (March 20 1992) (Revisions of Guidelines to Form N-1A) A fundrsquos portfolio security is illiquid if it cannot be disposed of in the ordinary course of business within seven days at approximately the value ascribed to it by the fund See Investment Company Act Release No 14983 (March 12 1986) 51 FR 9773 (March 21 1986) (adopting amendments to Rule 2a-7 under the 1940 Act) Investment Company Act Release No 17452 (April 23 1990) 55 FR 17933 (April 30 1990) (adopting Rule 144A under the Securities Act of 1933)
32 The NAV of the Fundrsquos Shares generally will be calculated once daily Monday through Friday as of the close of regular trading on the New York Stock Exchange generally 400 pm Eastern Time (the ldquoNAV Calculation Timerdquo) NAV per Share will be calculated by dividing the Fundrsquos net assets by the number of Fund Shares outstanding For more information regarding the valuation of Fund investments in calculating the Fundrsquos NAV see the Registration Statement
SR-NASDAQ-2015-011 Amendment No 2 Page 45 of 64
such instruments (the ldquoCreation Basketrdquo) In addition if there is a difference between the
NAV attributable to a Creation Unit and the market value of the Creation Basket
exchanged for the Creation Unit the party conveying instruments with the lower value
will pay to the other an amount in cash equal to the difference (referred to as the ldquoCash
Componentrdquo)
Creations and redemptions must be made by or through an Authorized Participant
that has executed an agreement that has been agreed to by the Distributor and BNY with
respect to creations and redemptions of Creation Units All standard orders to create
Creation Units must be received by the transfer agent no later than the closing time of the
regular trading session on the New York Stock Exchange (ordinarily 400 pm Eastern
Time) (the ldquoClosing Timerdquo) in each case on the date such order is placed in order for the
creation of Creation Units to be effected based on the NAV of Shares as next determined
on such date after receipt of the order in proper form Shares may be redeemed only in
Creation Units at their NAV next determined after receipt not later than the Closing Time
of a redemption request in proper form by the Fund through the transfer agent and only
on a business day
The Fundrsquos custodian through the National Securities Clearing Corporation will
make available on each business day prior to the opening of business of the Exchange
the list of the names and quantities of the instruments comprising the Creation Basket as
well as the estimated Cash Component (if any) for that day The published Creation
Basket will apply until a new Creation Basket is announced on the following business
day prior to commencement of trading in the Shares
SR-NASDAQ-2015-011 Amendment No 2 Page 46 of 64
Net Asset Value
The Fundrsquos NAV will be determined as of the close of trading (normally
400 pm Eastern Time) on each day the New York Stock Exchange is open for
business NAV will be calculated for the Fund by taking the market price of the Fundrsquos
total assets including interest or dividends accrued but not yet collected less all
liabilities and dividing such amount by the total number of Shares outstanding The
result rounded to the nearest cent will be the NAV per Share All valuations will be
subject to review by the Board of Trustees of the Trust (ldquoTrust Boardrdquo) or its delegate
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with valuation procedures (which may be revised from time to time) adopted by the Trust
Board (the ldquoValuation Proceduresrdquo) and in accordance with the 1940 Act A market
valuation generally means a valuation (i) obtained from an exchange an independent
pricing service (ldquoPricing Servicerdquo) or a major market maker (or dealer) or (ii) based on a
price quotation or other equivalent indication of value supplied by an exchange a Pricing
Service or a major market maker (or dealer) The information summarized below is
based on the Valuation Procedures as currently in effect however as noted above the
Valuation Procedures are amended from time to time and therefore such information is
subject to change
Certain securities including Floating Rate Debt Instruments in which the Fund
may invest will not be listed on any securities exchange or board of trade Such
securities will typically be bought and sold by institutional investors in individually
negotiated private transactions that function in many respects like an over-the-counter
SR-NASDAQ-2015-011 Amendment No 2 Page 47 of 64
secondary market although typically no formal market makers will exist Certain
securities particularly debt securities will have few or no trades or trade infrequently
and information regarding a specific security may not be widely available or may be
incomplete Accordingly determinations of the fair value of debt securities may be
based on infrequent and dated information Because there is less reliable objective data
available elements of judgment may play a greater role in valuation of debt securities
than for other types of securities Typically Floating Rate Debt Instruments and other
debt securities in which the Fund may invest (other than those described below) will be
valued using information provided by a Pricing Service Debt securities having a
remaining maturity of 60 days or less when purchased will be valued at cost adjusted for
amortization of premiums and accretion of discounts provided the Adviserrsquos pricing
committee (the ldquoPricing Committeerdquo) has determined that the use of amortized cost is an
appropriate reflection of fair value given market and issuer-specific conditions existing at
the time of the determination Overnight repurchase agreements will be valued at cost
and term repurchase agreements (ie those whose maturity exceeds seven days) will be
valued at the average of the bid quotations obtained daily from at least two recognized
dealers
Asset-backed and mortgage-backed securities will generally be valued by using a
Pricing Service If a Pricing Service does not cover a particular asset-backed or
mortgage-backed security or discontinues covering a particular asset-backed or
mortgage-backed security the security will be priced using broker quotes generally
provided by brokers that make or participate in markets in the security To derive values
Pricing Services and broker-dealers may use matrix pricing and valuation models as well
SR-NASDAQ-2015-011 Amendment No 2 Page 48 of 64
as recent market transactions for the same or similar assets As it deems appropriate the
Pricing Committee may determine that a Pricing Service price does not represent an
accurate value of an asset-backed or mortgage-backed security based on broker quotes it
receives a recent trade in the security by the Fund information from a portfolio manager
or other market information In the event that the Pricing Committee determines that the
Pricing Service price is unreliable or inaccurate based on such other information broker
quotes may be used Additionally if the Pricing Committee determines that the price of
an asset-backed or mortgage-backed security obtained from a Pricing Service and
available broker quotes is unreliable or inaccurate due to market conditions or other
reasons or if a Pricing Service price or broker quote is unavailable the security will be
valued using fair value pricing as described below
Equity securities listed on any exchange other than the Exchange will be valued at
the last sale price on the exchange on which they are principally traded on the business
day as of which such value is being determined Equity securities listed on the Exchange
will be valued at the official closing price on the business day as of which such value is
being determined If there has been no sale on such day or no official closing price in
the case of securities traded on the Exchange the securities will be valued using fair
value pricing as described below Equity securities traded on more than one securities
exchange will be valued at the last sale price or official closing price as applicable on
the business day as of which such value is being determined at the close of the exchange
representing the principal market for such securities
Exchange-traded options and futures contracts will be valued at the closing price
in the market where such contracts are principally traded
SR-NASDAQ-2015-011 Amendment No 2 Page 49 of 64
Certain securities including Floating Rate Debt Instruments in which the Fund
will invest will not be able to be priced by pre-established pricing methods Such
securities may be valued by the Trust Board or its delegate at fair value The use of fair
value pricing by the Fund will be governed by the Valuation Procedures and conducted in
accordance with the provisions of the 1940 Act Valuing the Fundrsquos securities using fair
value pricing will result in using prices for those securities that may differ from current
market valuations or official closing prices on the applicable exchange
Availability of Information
The Fundrsquos website (wwwftportfolioscom) which will be publicly available
prior to the public offering of Shares will include a form of the prospectus for the Fund
that may be downloaded The website will include the Sharesrsquo ticker CUSIP and
exchange information along with additional quantitative information updated on a daily
basis including for the Fund (1) daily trading volume the prior business dayrsquos reported
NAV and closing price mid-point of the bidask spread at the time of calculation of such
NAV (the ldquoBidAsk Pricerdquo)33 and a calculation of the premium and discount of the
BidAsk Price against the NAV and (2) data in chart format displaying the frequency
distribution of discounts and premiums of the daily BidAsk Price against the NAV
within appropriate ranges for each of the four previous calendar quarters On each
business day before commencement of trading in Shares in the Regular Market Session34
33 The BidAsk Price of the Fund will be determined using the mid-point of the highest bid and the lowest offer on the Exchange as of the time of calculation of the Fundrsquos NAV The records relating to BidAsk Prices will be retained by the Fund and its service providers
34 See Nasdaq Rule 4120(b)(4) (describing the three trading sessions on the Exchange (1) Pre-Market Session from 4 am to 930 am Eastern Time (2)
SR-NASDAQ-2015-011 Amendment No 2 Page 50 of 64
on the Exchange the Fund will disclose on its website the identities and quantities of the
portfolio of securities and other assets (the ldquoDisclosed Portfoliordquo as defined in Nasdaq
Rule 5735(c)(2)) held by the Fund that will form the basis for the Fundrsquos calculation of
NAV at the end of the business day 35 The Fundrsquos disclosure of derivative positions in
the Disclosed Portfolio will include information that market participants can use to value
these positions intraday On a daily basis the Fund will disclose on the Fundrsquos website
the following information regarding each portfolio holding as applicable to the type of
holding ticker symbol CUSIP number or other identifier if any a description of the
holding (including the type of holding) the identity of the security or other asset or
instrument underlying the holding if any for options the option strike price quantity
held (as measured by for example par value notional value or number of shares
contracts or units) maturity date if any coupon rate if any effective date if any market
value of the holding and percentage weighting of the holding in the Fundrsquos portfolio
The website information will be publicly available at no charge
In addition for the Fund an estimated value defined in Rule 5735(c)(3) as the
ldquoIntraday Indicative Valuerdquo that reflects an estimated intraday value of the Fundrsquos
Disclosed Portfolio will be disseminated Moreover the Intraday Indicative Value
Regular Market Session from 930 am to 4 pm or 415 pm Eastern Time and (3) Post-Market Session from 4 pm or 415 pm to 8 pm Eastern Time)
Under accounting procedures to be followed by the Fund trades made on the prior business day (ldquoTrdquo) will be booked and reflected in NAV on the current business day (ldquoT+1rdquo) Accordingly the Fund will be able to disclose at the beginning of the business day the portfolio that will form the basis for the NAV calculation at the end of the business day
35
SR-NASDAQ-2015-011 Amendment No 2 Page 51 of 64
available on the NASDAQ OMX Information LLC proprietary index data service36 will
be based upon the current value for the components of the Disclosed Portfolio and will be
updated and widely disseminated by one or more major market data vendors and broadly
displayed at least every 15 seconds during the Regular Market Session The Intraday
Indicative Value will be based on quotes and closing prices from the securitiesrsquo local
market and may not reflect events that occur subsequent to the local marketrsquos close
Premiums and discounts between the Intraday Indicative Value and the market price may
occur This should not be viewed as a ldquoreal timerdquo update of the NAV per Share of the
Fund which is calculated only once a day
The dissemination of the Intraday Indicative Value together with the Disclosed
Portfolio will allow investors to determine the value of the underlying portfolio of the
Fund on a daily basis and will provide a close estimate of that value throughout the
trading day
Investors will also be able to obtain the Fundrsquos Statement of Additional
Information (ldquoSAIrdquo) the Fundrsquos annual and semi-annual reports (together ldquoShareholder
Reportsrdquo) and its Form N-CSR and Form N-SAR filed twice a year The Fundrsquos SAI
and Shareholder Reports will be available free upon request from the Fund and those
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or
downloaded from the Commissionrsquos website at wwwsecgov Information regarding
Currently the NASDAQ OMX Global Index Data Service (ldquoGIDSrdquo) is the NASDAQ OMX global index data feed service offering real-time updates daily summary messages and access to widely followed indexes and Intraday Indicative Values for ETFs GIDS provides investment professionals with the daily information needed to track or trade NASDAQ OMX indexes listed ETFs or third-party partner indexes and ETFs
36
SR-NASDAQ-2015-011 Amendment No 2 Page 52 of 64
market price and trading volume of the Shares will be continually available on a real-time
basis throughout the day on brokersrsquo computer screens and other electronic services
Information regarding the previous dayrsquos closing price and trading volume information
for the Shares will be published daily in the financial section of newspapers Quotation
and last sale information for the Shares will be available via Nasdaq proprietary quote
and trade services as well as in accordance with the Unlisted Trading Privileges and the
Consolidated Tape Association (ldquoCTArdquo) plans for the Shares Quotation and last sale
information for the other ETFs in which the Fund will invest will be available via the
quote and trade services of their respective primary exchanges as well as in accordance
with the Unlisted Trading Privileges and the CTA plans as applicable Quotation and
last sale information for US exchange-traded options will be available via the Options
Price Reporting Authority Intraday executable price quotations on Floating Rate Debt
Instruments and other assets not traded on an exchange will be available from major
broker-dealer firms or market data vendors as well as from automated quotation systems
published or other public sources or online information services Additionally the Trade
Reporting and Compliance Engine (ldquoTRACErdquo) of the Financial Industry Regulatory
Authority (ldquoFINRArdquo) will be a source of price information for corporate bonds
privately-issued securities mortgage-backed securities and asset-backed securities to the
extent transactions in such securities are reported to TRACE37 For exchange-traded
Broker-dealers that are FINRA member firms have an obligation to report transactions in specified debt securities to TRACE to the extent required under applicable FINRA rules Generally such debt securities will have at issuance a maturity that exceeds one calendar year
37
SR-NASDAQ-2015-011 Amendment No 2 Page 53 of 64
assets intraday pricing information will be available directly from the applicable listing
exchange
Additional information regarding the Fund and the Shares including investment
strategies risks creation and redemption procedures fees Fund holdings disclosure
policies distributions and taxes will be included in the Registration Statement
Initial and Continued Listing
The Shares will be subject to Rule 5735 which sets forth the initial and continued
listing criteria applicable to Managed Fund Shares The Exchange represents that for
initial andor continued listing the Fund must be in compliance with Rule 10A-338 under
the Act A minimum of 100000 Shares will be outstanding at the commencement of
trading on the Exchange The Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the NAV and the
Disclosed Portfolio will be made available to all market participants at the same time
Trading Halts
With respect to trading halts the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading in the Shares of the Fund Nasdaq will
halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12) Trading may be
halted because of market conditions or for reasons that in the view of the Exchange
make trading in the Shares inadvisable These may include (1) the extent to which
trading is not occurring in the securities andor the other assets constituting the Disclosed
Portfolio of the Fund or (2) whether other unusual conditions or circumstances
See 17 CFR 24010A-3 38
SR-NASDAQ-2015-011 Amendment No 2 Page 54 of 64
detrimental to the maintenance of a fair and orderly market are present Trading in the
Shares also will be subject to Rule 5735(d)(2)(D) which sets forth circumstances under
which Shares of the Fund may be halted
Trading Rules
Nasdaq deems the Shares to be equity securities thus rendering trading in the
Shares subject to Nasdaqrsquos existing rules governing the trading of equity securities
Nasdaq will allow trading in the Shares from 400 am until 800 pm Eastern Time
The Exchange has appropriate rules to facilitate transactions in the Shares during all
trading sessions As provided in Nasdaq Rule 5735(b)(3) the minimum price variation
for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $001
Surveillance
The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws39 The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities laws
The surveillances referred to above generally focus on detecting securities trading
outside their normal patterns which could be indicative of manipulative or other violative
activity When such situations are detected surveillance analysis follows and
FINRA surveils trading on the Exchange pursuant to a regulatory services agreement The Exchange is responsible for FINRArsquos performance under this regulatory services agreement
39
SR-NASDAQ-2015-011 Amendment No 2 Page 55 of 64
investigations are opened where appropriate to review the behavior of all relevant
parties for all relevant trading violations
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 56 of 64
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
SR-NASDAQ-2015-011 Amendment No 2 Page 57 of 64
2 Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
SR-NASDAQ-2015-011 Amendment No 2 Page 58 of 64
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
SR-NASDAQ-2015-011 Amendment No 2 Page 59 of 64
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
SR-NASDAQ-2015-011 Amendment No 2 Page 60 of 64
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 61 of 64
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
SR-NASDAQ-2015-011 Amendment No 2 Page 62 of 64
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
B Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
C Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received From Members Participants or Others
Written comments were neither solicited nor received
III Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Within 45 days of the date of publication of this notice in the Federal Register or
within such longer period (i) as the Commission may designate up to 90 days of such date
if it finds such longer period to be appropriate and publishes its reasons for so finding or
(ii) as to which the Exchange consents the Commission shall (a) by order approve or
disapprove such proposed rule change or (b) institute proceedings to determine whether
the proposed rule change should be disapproved
SR-NASDAQ-2015-011 Amendment No 2 Page 63 of 64
IV Solicitation of Comments
Interested persons are invited to submit written data views and arguments
concerning the foregoing including whether the proposed rule change is consistent with
the Act Comments may be submitted by any of the following methods
Electronic comments
bull Use the Commissionrsquos Internet comment form
(httpwwwsecgovrulessroshtml) or
bull Send an e-mail to rule-commentssecgov Please include File Number
SR-NASDAQ-2015-011 on the subject line
Paper comments
bull Send paper comments in triplicate to Brent J Fields Secretary Securities and
Exchange Commission Station Place 100 F Street NE Washington DC
20549-9303
All submissions should refer to File Number SR-NASDAQ-2015-011 This file number
should be included on the subject line if e-mail is used To help the Commission process
and review your comments more efficiently please use only one method The
Commission will post all comments on the Commissionrsquos Internet website
httpwwwsecgovrulessroshtml
Copies of the submission all subsequent amendments all written statements with
respect to the proposed rule change that are filed with the Commission and all written
communications relating to the proposed rule change between the Commission and any
person other than those that may be withheld from the public in accordance with the
provisions of 5 USC 552 will be available for website viewing and printing in the
Commissionrsquos Public Reference Room 100 F Street NE Washington DC 20549 on
SR-NASDAQ-2015-011 Amendment No 2 Page 64 of 64
official business days between the hours of 1000 am and 300 pm Copies of the filing
also will be available for inspection and copying at the principal office of Nasdaq All
comments received will be posted without change the Commission does not edit
personal identifying information from submissions You should submit only information
that you wish to make available publicly
All submissions should refer to File Number SR-NASDAQ-2015-011 and should
be submitted on or before [insert date 21 days from publication in the Federal Register]
For the Commission by the Division of Trading and Markets pursuant to
delegated authority41
Kevin M OrsquoNeill Deputy Secretary
17 CFR 20030-3(a)(12) 41
SR-NASDAQ-2015-011 Amendment No 2 Page 21 of 64
basis throughout the day on brokersrsquo computer screens and other electronic services
Information regarding the previous dayrsquos closing price and trading volume information
for the Shares will be published daily in the financial section of newspapers Quotation
and last sale information for the Shares will be available via Nasdaq proprietary quote
and trade services as well as in accordance with the Unlisted Trading Privileges and the
Consolidated Tape Association (ldquoCTArdquo) plans for the Shares Quotation and last sale
information for the other ETFs in which the Fund will invest will be available via the
quote and trade services of their respective primary exchanges as well as in accordance
with the Unlisted Trading Privileges and the CTA plans as applicable Quotation and
last sale information for US exchange-traded options will be available via the Options
Price Reporting Authority Intraday executable price quotations on Floating Rate Debt
Instruments and other assets not traded on an exchange will be available from major
broker-dealer firms or market data vendors as well as from automated quotation systems
published or other public sources or online information services Additionally the Trade
Reporting and Compliance Engine (ldquoTRACErdquo) of the Financial Industry Regulatory
Authority (ldquoFINRArdquo) will be a source of price information for corporate bonds
privately-issued securities mortgage-backed securities and asset-backed securities to the
extent transactions in such securities are reported to TRACE37 For exchange-traded
assets intraday pricing information will be available directly from the applicable listing
exchange
Broker-dealers that are FINRA member firms have an obligation to report transactions in specified debt securities to TRACE to the extent required under applicable FINRA rules Generally such debt securities will have at issuance a maturity that exceeds one calendar year
37
SR-NASDAQ-2015-011 Amendment No 2 Page 22 of 64
Additional information regarding the Fund and the Shares including investment
strategies risks creation and redemption procedures fees Fund holdings disclosure
policies distributions and taxes will be included in the Registration Statement
Initial and Continued Listing
The Shares will be subject to Rule 5735 which sets forth the initial and continued
listing criteria applicable to Managed Fund Shares The Exchange represents that for
initial andor continued listing the Fund must be in compliance with Rule 10A-338 under
the Act A minimum of 100000 Shares will be outstanding at the commencement of
trading on the Exchange The Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the NAV and the
Disclosed Portfolio will be made available to all market participants at the same time
Trading Halts
With respect to trading halts the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading in the Shares of the Fund Nasdaq will
halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12) Trading may be
halted because of market conditions or for reasons that in the view of the Exchange
make trading in the Shares inadvisable These may include (1) the extent to which
trading is not occurring in the securities andor the other assets constituting the Disclosed
Portfolio of the Fund or (2) whether other unusual conditions or circumstances
detrimental to the maintenance of a fair and orderly market are present Trading in the
See 17 CFR 24010A-3 38
SR-NASDAQ-2015-011 Amendment No 2 Page 23 of 64
Shares also will be subject to Rule 5735(d)(2)(D) which sets forth circumstances under
which Shares of the Fund may be halted
Trading Rules
Nasdaq deems the Shares to be equity securities thus rendering trading in the
Shares subject to Nasdaqrsquos existing rules governing the trading of equity securities
Nasdaq will allow trading in the Shares from 400 am until 800 pm Eastern Time
The Exchange has appropriate rules to facilitate transactions in the Shares during all
trading sessions As provided in Nasdaq Rule 5735(b)(3) the minimum price variation
for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $001
Surveillance
The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws39 The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities laws
The surveillances referred to above generally focus on detecting securities trading
outside their normal patterns which could be indicative of manipulative or other violative
activity When such situations are detected surveillance analysis follows and
investigations are opened where appropriate to review the behavior of all relevant
parties for all relevant trading violations
FINRA surveils trading on the Exchange pursuant to a regulatory services agreement The Exchange is responsible for FINRArsquos performance under this regulatory services agreement
39
SR-NASDAQ-2015-011 Amendment No 2 Page 24 of 64
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 25 of 64
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
b Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
SR-NASDAQ-2015-011 Amendment No 2 Page 26 of 64
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
SR-NASDAQ-2015-011 Amendment No 2 Page 27 of 64
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
SR-NASDAQ-2015-011 Amendment No 2 Page 28 of 64
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
SR-NASDAQ-2015-011 Amendment No 2 Page 29 of 64
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
SR-NASDAQ-2015-011 Amendment No 2 Page 30 of 64
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
SR-NASDAQ-2015-011 Amendment No 2 Page 31 of 64
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
4 Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
5 Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received from Members Participants or Others
Written comments were neither solicited nor received
6 Extension of Time Period for Commission Action
The Exchange does not consent at this time to an extension of any time period for
Commission action
7 Basis for Summary Effectiveness Pursuant to Section 19(b)(3) or for Accelerated Effectiveness Pursuant to Section 19(b)(2)
Not applicable
8 Proposed Rule Change Based on Rules of Another Self-Regulatory Organization or of the Commission
Not applicable
9 Security-Based Swap Submissions Filed Pursuant to Section 3C of the Act
Not applicable
SR-NASDAQ-2015-011 Amendment No 2 Page 32 of 64
10 Advance Notices Filed Pursuant to Section 806(e) of the Payment Clearing and Settlement Supervision Act
Not applicable
11 Exhibits
1 Completed notice of proposed rule change for publication in the Federal
Register
SR-NASDAQ-2015-011 Amendment No 2 Page 33 of 64
EXHIBIT 1
SECURITIES AND EXCHANGE COMMISSION (Release No 34shy File No SR-NASDAQ-2015-011)
April __ 2015
Self-Regulatory Organizations The NASDAQ Stock Market LLC Notice of Filing of Proposed Rule Change Relating to the Listing and Trading of the Shares of the First Trust Strategic Floating Rate ETF of First Trust Exchange-Traded Fund IV
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (ldquoActrdquo)1 and
Rule 19b-4 thereunder2 notice is hereby given that on February 12 2015 The NASDAQ
Stock Market LLC (ldquoNasdaqrdquo or the ldquoExchangerdquo) filed with the Securities and Exchange
Commission (ldquoCommissionrdquo) the proposed rule change as described in in Items I II and
III below which Items have been prepared by Nasdaq On April 6 2015 Nasdaq filed
Amendment No 1 which replaced the text of the original filing in its entirety On April
15 2015 Nasdaq filed Amendment No 2 which replaced the text of the original filing in
its entirety The Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons
I Self-Regulatory Organizationrsquos Statement of the Terms of Substance of the Proposed Rule Change
Nasdaq proposes to list and trade the shares of the First Trust Strategic Floating
Rate ETF (the ldquoFundrdquo) of the First Trust Strategic Floating Rate ETF (the ldquoFundrdquo) of
First Trust Exchange-Traded Fund IV (the ldquoTrustrdquo) under Nasdaq Rule 5735 (ldquoManaged
1 15 USC 78s(b)(1)
2 17 CFR 24019b-4
SR-NASDAQ-2015-011 Amendment No 2 Page 34 of 64
Fund Sharesrdquo)3 The shares of the Fund are collectively referred to herein as the
ldquoSharesrdquo
The text of the proposed rule change is available at
httpnasdaqcchwallstreetcom at Nasdaqrsquos principal office and at the Commissionrsquos
Public Reference Room
II Self-Regulatory Organizationrsquos Statement of the Purpose of and Statutory Basis for the Proposed Rule Change
In its filing with the Commission Nasdaq included statements concerning the
purpose of and basis for the proposed rule change The text of these statements may be
examined at the places specified in Item IV below Nasdaq has prepared summaries set
forth in Sections A B and C below of the most significant aspects of such statements
A Self-Regulatory Organizationrsquos Statement of the Purpose of and Statutory Basis for the Proposed Rule Change
1 Purpose
The Exchange proposes to list and trade the Shares of the Fund under Nasdaq
Rule 5735 which governs the listing and trading of Managed Fund Shares4 on the
3 The Commission approved Nasdaq Rule 5735 in Securities Exchange Act Release No 57962 (June 13 2008) 73 FR 35175 (June 20 2008) (SR-NASDAQ-2008shy039) There are already multiple actively-managed funds listed on the Exchange see eg Securities Exchange Act Release Nos 69464 (April 26 2013) 78 FR 25774 (May 2 2013) (SR-NASDAQ-2013-036) (order approving listing and trading of First Trust Senior Loan Fund) 68972 (February 22 2013) 78 FR 13721 (February 28 2013) (SR-NASDAQ-2012-147) (order approving listing and trading of First Trust High Yield LongShort ETF) 66489 (February 29 2012) 77 FR 13379 (March 6 2012) (SR-NASDAQ-2012-004) (order approving listing and trading of WisdomTree Emerging Markets Corporate Bond Fund) The Exchange believes the proposed rule change raises no significant issues not previously addressed in those prior Commission orders
4 A Managed Fund Share is a security that represents an interest in an investment company registered under the Investment Company Act of 1940 (15 USC 80ashy
SR-NASDAQ-2015-011 Amendment No 2 Page 35 of 64
Exchange The Fund will be an actively-managed exchange-traded fund (ldquoETFrdquo) The
Shares will be offered by the Trust which was established as a Massachusetts business
trust on September 15 20105 The Trust is registered with the Commission as an
investment company and has filed a registration statement on Form N-1A (ldquoRegistration
Statementrdquo) with the Commission6 The Fund will be a series of the Trust The Fund
intends to qualify each year as a regulated investment company (ldquoRICrdquo) under
Subchapter M of the Internal Revenue Code of 1986 as amended
First Trust Advisors LP will be the investment adviser (ldquoAdviserrdquo) to the Fund
First Trust Portfolios LP (the ldquoDistributorrdquo) will be the principal underwriter and
distributor of the Fundrsquos Shares The Bank of New York Mellon Corporation (ldquoBNYrdquo)
will act as the administrator accounting agent custodian and transfer agent to the Fund
1) (the ldquo1940 Actrdquo) organized as an open-end investment company or similar entity that invests in a portfolio of securities selected by its investment adviser consistent with its investment objectives and policies In contrast an open-end investment company that issues Index Fund Shares listed and traded on the Exchange under Nasdaq Rule 5705 seeks to provide investment results that correspond generally to the price and yield performance of a specific foreign or domestic stock index fixed income securities index or combination thereof
5 The Commission has issued an order upon which the Trust may rely granting certain exemptive relief under the 1940 Act See Investment Company Act Release No 30029 (April 10 2012) (File No 812-13795) (the ldquoExemptive Reliefrdquo) In addition the Commission has issued no-action relief upon which the Trust may rely pertaining to the Fundrsquos ability to invest in derivatives notwithstanding certain representations in the application for the Exemptive Relief See Commission No-Action Letter (December 6 2012)
6 See Post-Effective Amendment No 104 to Registration Statement on Form N-1A for the Trust dated January 29 2015 (File Nos 333-174332 and 811-22559) The descriptions of the Fund and the Shares contained herein are based in part on information in the Registration Statement
7
SR-NASDAQ-2015-011 Amendment No 2 Page 36 of 64
Paragraph (g) of Rule 5735 provides that if the investment adviser to the
investment company issuing Managed Fund Shares is affiliated with a broker-dealer
such investment adviser shall erect a ldquofire wallrdquo between the investment adviser and the
broker-dealer with respect to access to information concerning the composition andor
changes to such investment company portfolio7 In addition paragraph (g) further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio Rule 5735(g) is similar
to Nasdaq Rule 5705(b)(5)(A)(i) however paragraph (g) in connection with the
establishment of a ldquofire wallrdquo between the investment adviser and the broker-dealer
reflects the applicable open-end fundrsquos portfolio not an underlying benchmark index as
is the case with index-based funds The Adviser is not a broker-dealer although it is
affiliated with the Distributor a broker-dealer The Adviser has implemented a fire wall
An investment adviser to an open-end fund is required to be registered under the Investment Advisers Act of 1940 (the ldquoAdvisers Actrdquo) As a result the Adviser and its related personnel are subject to the provisions of Rule 204A-1 under the Advisers Act relating to codes of ethics This Rule requires investment advisers to adopt a code of ethics that reflects the fiduciary nature of the relationship to clients as well as compliance with other applicable securities laws Accordingly procedures designed to prevent the communication and misuse of non-public information by an investment adviser must be consistent with Rule 204A-1 under the Advisers Act In addition Rule 206(4)-7 under the Advisers Act makes it unlawful for an investment adviser to provide investment advice to clients unless such investment adviser has (i) adopted and implemented written policies and procedures reasonably designed to prevent violation by the investment adviser and its supervised persons of the Advisers Act and the Commission rules adopted thereunder (ii) implemented at a minimum an annual review regarding the adequacy of the policies and procedures established pursuant to subparagraph (i) above and the effectiveness of their implementation and (iii) designated an individual (who is a supervised person) responsible for administering the policies and procedures adopted under subparagraph (i) above
8
SR-NASDAQ-2015-011 Amendment No 2 Page 37 of 64
with respect to its broker-dealer affiliate regarding access to information concerning the
composition andor changes to the portfolio In addition personnel who make decisions
on the Fundrsquos portfolio composition will be subject to procedures designed to prevent the
use and dissemination of material non-public information regarding the Fundrsquos portfolio
In the event (a) the Adviser becomes or becomes newly affiliated with a broker-dealer
or (b) any new adviser or sub-adviser is a registered broker-dealer or becomes affiliated
with another broker-dealer it will implement a fire wall with respect to its relevant
personnel andor such broker-dealer affiliate as applicable regarding access to
information concerning the composition andor changes to the portfolio and will be
subject to procedures designed to prevent the use and dissemination of material
non-public information regarding such portfolio The Fund does not currently intend to
use a sub-adviser
First Trust Strategic Floating Rate ETF
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions8 at least 80 of its
The term ldquounder normal market conditionsrdquo as used herein includes but is not limited to the absence of adverse market economic political or other conditions including extreme volatility or trading halts in the fixed income markets or the financial markets generally operational issues causing dissemination of inaccurate market information or force majeure type events such as systems failure natural or man-made disaster act of God armed conflict act of terrorism riot or labor disruption or any similar intervening circumstance For temporary defensive purposes during the initial invest-up period and during periods of high cash inflows or outflows the Fund may depart from its principal investment strategies for example it may hold a higher than normal proportion of its assets in cash During such periods the Fund may not be able to achieve its investment objective The Fund may adopt a defensive strategy when the Adviser believes securities in which the Fund normally invests have elevated risks due to political or economic factors and in other extraordinary circumstances
SR-NASDAQ-2015-011 Amendment No 2 Page 38 of 64
net assets in a portfolio of the following types of floating-rate9 debt instruments issued by
US and non-US public- and private-sector entities floating-rate corporate10 and
government bonds and notes floating-rate agency securities 11 floating-rate instruments
of non-US issuers floating-rate privately-issued securities 12 floating-rate asset-backed
securities 13 floating-rate mortgage-backed securities14 floating-rate loans 15 and
9 For the avoidance of doubt the term ldquofloating-raterdquo shall also include similar terms such as ldquovariable-raterdquo and ldquoadjustable-raterdquo
10 The Adviser expects that under normal market conditions generally for a corporate bond to be considered as an eligible investment after taking into account such an investment at least 75 of the Fundrsquos net assets that are invested in floating-rate corporate bonds and as described below fixed-rate corporate bonds (in the aggregate) will be comprised of corporate bonds that have at the time of original issuance $100 million or more par amount outstanding
11 ldquoAgency securitiesrdquo for these purposes generally includes securities issued by the following entities Government National Mortgage Association (Ginnie Mae) Federal National Mortgage Association (Fannie Mae) Federal Home Loan Banks (FHLBanks) Federal Home Loan Mortgage Corporation (Freddie Mac) Farm Credit System (FCS) Farm Credit Banks (FCBanks) Student Loan Marketing Association (Sallie Mae) Resolution Funding Corporation (REFCORP) Financing Corporation (FICO) and the Farm Credit System (FCS) Financial Assistance Corporation (FAC) Agency securities can include but are not limited to mortgage-backed securities
12 ldquoPrivately-issued securitiesrdquo for these purposes generally includes Rule 144A securities other than mortgage-backed Rule 144A securities Under normal market conditions privately-issued securities will have at the time of original issuance $100 million or more principal amount outstanding to be considered eligible investments
13 Asset-backed securities are securities that are backed by a pool of assets The Fund currently intends to invest in asset-backed securities that are consumer asset-backed securities
14 Mortgage-backed securities which are securities that directly or indirectly represent a participation in or are secured by and payable from mortgage loans on real property will consist of (1) residential mortgage-backed securities (ldquoRMBSrdquo) (2) commercial mortgage-backed securities (ldquoCMBSrdquo) (3) stripped mortgage-backed securities (ldquoSMBSrdquo) which are mortgage-backed securities
SR-NASDAQ-2015-011 Amendment No 2 Page 39 of 64
investment companies16 (including investment companies advised by the Adviser) that
invest primarily in the foregoing types of debt instruments17 (collectively ldquoFloating Rate
Debt Instrumentsrdquo)
where mortgage payments are divided between paying the loanrsquos principal and paying the loanrsquos interest (4) collateralized mortgage obligations (ldquoCMOsrdquo) and real estate mortgage investment conduits (ldquoREMICsrdquo) which are mortgage-backed securities that are divided into multiple classes with each class being entitled to a different share of the principal and interest payments received from the pool of underlying assets
15 The floating-rate loans in which the Fund will invest will represent amounts borrowed by companies or other entities from banks and other lenders and a significant portion of such floating-rate loans may be rated below investment grade or unrated Floating-rate loans held by the Fund may be senior or subordinate obligations of the borrower and may or may not be secured by collateral First lien senior secured floating-rate loans are referred to herein as ldquosenior loansrdquo Floating-rate loans that are not senior loans (ie unsecured floating-rate loans and secured floating-rate loans that are not first lien floating-rate loans) are referred to herein as ldquojunior loansrdquo The Fund will generally invest in floating-rate loans that the Adviser deems to be liquid with readily available prices notwithstanding the foregoing the Fund may invest in floating-rate loans that are deemed illiquid so long as the Fund complies with the 15 limitation on investments of its net assets in illiquid assets described below under ldquoInvestment Restrictionsrdquo
16 The Fund currently anticipates investing only in registered open-end investment companies that are listed and traded in the US on registered exchanges (ie other ETFs) An ETF is an investment company registered under the 1940 Act that holds a portfolio of securities Many ETFs are designed to track the performance of a securities index including industry sector country and region indexes The Fund may invest in the securities of ETFs in excess of the limits imposed under the 1940 Act pursuant to exemptive orders obtained by other ETFs and their sponsors from the Commission In addition the Fund may invest in the securities of certain investment companies in excess of the limits imposed under the 1940 Act pursuant to an exemptive order obtained by the Trust and the Adviser from the Commission See Investment Company Act Release No 30377 (February 5 2013) (File No 812-13895) The ETFs in which the Fund may invest include Index Fund Shares (as described in Nasdaq Rule 5705) Portfolio Depository Receipts (as described in Nasdaq Rule 5705) and Managed Fund Shares (as described in Nasdaq Rule 5735) While the Fund may invest in inverse ETFs the Fund will not invest in leveraged or inverse leveraged (eg 2X or -3X) ETFs
SR-NASDAQ-2015-011 Amendment No 2 Page 40 of 64
At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade To be considered
ldquoinvestment graderdquo under normal market conditions rated Floating Rate Debt
Instruments will carry at the time of purchase a rating in the highest four rating
categories of at least one nationally recognized statistical ratings organization
(ldquoNRSROrdquo) (eg BBB- or higher by Standard amp Poorrsquos Ratings Services (ldquoSampPrdquo)
andor Fitch Ratings (ldquoFitchrdquo) or Baa3 or higher by Moodyrsquos Investors Service Inc
(ldquoMoodyrsquosrdquo)18 For unrated securities to be considered ldquoinvestment graderdquo under normal
market conditions such securities will be determined at the time of purchase to be of
comparable quality19 by the Adviser The Fund may invest up to 35 of its net assets in
securities that are at the time of investment rated below investment grade by each
NRSRO rating such securities (or securities that are unrated and determined by the
17 The liquidity of a security especially in the case of asset-backed and mortgage-backed securities will be a substantial factor in the Fundrsquos security selection process Consistent with the discussion below under ldquoInvestment Restrictionsrdquo the Fund will not purchase any Floating Rate Debt Instruments (including asset-backed securities and mortgage-backed securities) that in the Adviserrsquos opinion are illiquid if as a result more than 15 of the value of the Fundrsquos net assets will be invested in illiquid assets
18 For the avoidance of doubt if a security is rated by multiple NRSROs and receives different ratings the Fund will treat the security as being rated in the highest rating category received from an NRSRO
19 Comparable quality of unrated securities will be determined by the Adviser based on fundamental credit analysis of the unrated security and comparable NRSRO-rated securities On a best efforts basis the Adviser will attempt to make a rating determination based on publicly available data In making a ldquocomparable qualityrdquo determination the Adviser may consider for example whether the issuer of the security has issued other rated securities the nature and provisions of the relevant security whether the obligations under the relevant security are guaranteed by another entity and the rating of such guarantor (if any) relevant cash flows macroeconomic analysis andor sector or industry analysis
SR-NASDAQ-2015-011 Amendment No 2 Page 41 of 64
Adviser to be of comparable quality) commonly referred to as ldquohigh yieldrdquo or ldquojunkrdquo
bonds If subsequent to purchase by the Fund a security held by the Fund experiences a
decline in credit quality and falls below investment grade the Fund may continue to hold
the security and it will not cause the Fund to violate the 35 investment limitation
however the security will be taken into account for purposes of determining whether
purchases of additional securities will cause the Fund to violate such limitation
The Fund will limit its investments in asset-backed securities (excluding agency
mortgage-backed securities) and non-agency mortgage-backed securities (in the
aggregate) to 20 of its net assets20 In addition the Fund will limit its investments in
junior loans to 20 of its net assets
The Fund will hold debt securities (including in the aggregate Floating Rate
Debt Instruments and the fixed-rate debt securities described below) of at least 13
non-affiliated issuers
Other Investments
Under normal market conditions the Fund will invest primarily in the Floating
Rate Debt Instruments described above to meet its investment objective In addition the
Fund may invest up to 20 of its net assets in the following types of fixed-rate debt
securities corporate21 and government bonds and notes agency securities22 instruments
20 For the avoidance of doubt there is no limitation on the Fundrsquos investments in agency mortgage-backed securities
21 See footnote 10 above
22 See footnote 11 above
SR-NASDAQ-2015-011 Amendment No 2 Page 42 of 64
of non-US issuers in developed markets privately-issued securities 23 asset-backed
securities 24 mortgage-backed securities 25 municipal bonds money market securities26
and investment companies27 (including investment companies advised by the Adviser)
that invest primarily in the foregoing types of debt securities
Further to pursue its investment objective the Fund may invest up to 20 of the
value of its net assets in exchange-listed options on US Treasury futures contracts and
exchange-listed US Treasury futures contracts28 The use of these derivative
transactions may allow the Fund to obtain net long or short exposures to selected interest
rates These derivatives may also be used to hedge risks including interest rate risks and
credit risks associated with the Fundrsquos portfolio investments The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
23 See footnote 12 above
24 See footnote 13 above
25 See footnote 14 above
26 ldquoMoney market securitiesrdquo for these purposes generally includes short-term high-quality obligations issued or guaranteed by the US Treasury or the agencies or instrumentalities of the US government short-term high-quality securities issued or guaranteed by non-US governments agencies and instrumentalities repurchase agreements commercial paper (both asset-backed and non-assetshybacked) and deposits and other obligations of US and non-US banks and financial institutions
27 See footnote 16 above
28 At least 90 of the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be invested in instruments that trade in markets that are members of the Intermarket Surveillance Group (ldquoISGrdquo) (see footnote 40 below) or are parties to a comprehensive surveillance sharing agreement with the Exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 43 of 64
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index
Investment Restrictions
The Fund will not invest 25 or more of the value of its total assets in securities
of issuers in any one industry This restriction does not apply to (a) obligations issued or
guaranteed by the US government its agencies or instrumentalities or (b) securities of
other investment companies29
The Fund may hold up to an aggregate amount of 15 of its net assets in illiquid
assets (calculated at the time of investment) including Rule 144A securities deemed
illiquid by the Adviser30 The Fund will monitor its portfolio liquidity on an ongoing
basis to determine whether in light of current circumstances an adequate level of
liquidity is being maintained and will consider taking appropriate steps in order to
maintain adequate liquidity if through a change in values net assets or other
circumstances more than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid
assets include securities subject to contractual or other restrictions on resale and other
29 See Form N-1A Item 9 The Commission has taken the position that a fund is concentrated if it invests more than 25 of the value of its total assets in any one industry See eg Investment Company Act Release No 9011 (October 30 1975) 40 FR 54241 (November 21 1975)
30 In reaching liquidity decisions the Adviser may consider the following factors the frequency of trades and quotes for the security the number of dealers wishing to purchase or sell the security and the number of other potential purchasers dealer undertakings to make a market in the security and the nature of the security and the nature of the marketplace in which it trades (eg the time needed to dispose of the security the method of soliciting offers and the mechanics of transfer)
SR-NASDAQ-2015-011 Amendment No 2 Page 44 of 64
instruments that lack readily available markets as determined in accordance with
Commission staff guidance31
The Fund will not invest in non-US equity securities
Creation and Redemption of Shares
The Fund will issue and redeem Shares on a continuous basis at net asset value
(ldquoNAVrdquo)32 only in large blocks of Shares (ldquoCreation Unitsrdquo) in transactions with
authorized participants generally including broker-dealers and large institutional
investors (ldquoAuthorized Participantsrdquo) Creation Units generally will consist of 50000
Shares although this may change from time to time Creation Units however are not
expected to consist of less than 50000 Shares As described in the Registration
Statement and consistent with the Exemptive Relief the Fund will issue and redeem
Creation Units in exchange for an in-kind portfolio of instruments andor cash in lieu of
31 The Commission has stated that long-standing Commission guidelines have required open-end funds to hold no more than 15 of their net assets in illiquid securities and other illiquid assets See Investment Company Act Release No 28193 (March 11 2008) 73 FR 14618 (March 18 2008) footnote 34 See also Investment Company Act Release No 5847 (October 21 1969) 35 FR 19989 (December 31 1970) (Statement Regarding ldquoRestricted Securitiesrdquo) Investment Company Act Release No 18612 (March 12 1992) 57 FR 9828 (March 20 1992) (Revisions of Guidelines to Form N-1A) A fundrsquos portfolio security is illiquid if it cannot be disposed of in the ordinary course of business within seven days at approximately the value ascribed to it by the fund See Investment Company Act Release No 14983 (March 12 1986) 51 FR 9773 (March 21 1986) (adopting amendments to Rule 2a-7 under the 1940 Act) Investment Company Act Release No 17452 (April 23 1990) 55 FR 17933 (April 30 1990) (adopting Rule 144A under the Securities Act of 1933)
32 The NAV of the Fundrsquos Shares generally will be calculated once daily Monday through Friday as of the close of regular trading on the New York Stock Exchange generally 400 pm Eastern Time (the ldquoNAV Calculation Timerdquo) NAV per Share will be calculated by dividing the Fundrsquos net assets by the number of Fund Shares outstanding For more information regarding the valuation of Fund investments in calculating the Fundrsquos NAV see the Registration Statement
SR-NASDAQ-2015-011 Amendment No 2 Page 45 of 64
such instruments (the ldquoCreation Basketrdquo) In addition if there is a difference between the
NAV attributable to a Creation Unit and the market value of the Creation Basket
exchanged for the Creation Unit the party conveying instruments with the lower value
will pay to the other an amount in cash equal to the difference (referred to as the ldquoCash
Componentrdquo)
Creations and redemptions must be made by or through an Authorized Participant
that has executed an agreement that has been agreed to by the Distributor and BNY with
respect to creations and redemptions of Creation Units All standard orders to create
Creation Units must be received by the transfer agent no later than the closing time of the
regular trading session on the New York Stock Exchange (ordinarily 400 pm Eastern
Time) (the ldquoClosing Timerdquo) in each case on the date such order is placed in order for the
creation of Creation Units to be effected based on the NAV of Shares as next determined
on such date after receipt of the order in proper form Shares may be redeemed only in
Creation Units at their NAV next determined after receipt not later than the Closing Time
of a redemption request in proper form by the Fund through the transfer agent and only
on a business day
The Fundrsquos custodian through the National Securities Clearing Corporation will
make available on each business day prior to the opening of business of the Exchange
the list of the names and quantities of the instruments comprising the Creation Basket as
well as the estimated Cash Component (if any) for that day The published Creation
Basket will apply until a new Creation Basket is announced on the following business
day prior to commencement of trading in the Shares
SR-NASDAQ-2015-011 Amendment No 2 Page 46 of 64
Net Asset Value
The Fundrsquos NAV will be determined as of the close of trading (normally
400 pm Eastern Time) on each day the New York Stock Exchange is open for
business NAV will be calculated for the Fund by taking the market price of the Fundrsquos
total assets including interest or dividends accrued but not yet collected less all
liabilities and dividing such amount by the total number of Shares outstanding The
result rounded to the nearest cent will be the NAV per Share All valuations will be
subject to review by the Board of Trustees of the Trust (ldquoTrust Boardrdquo) or its delegate
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with valuation procedures (which may be revised from time to time) adopted by the Trust
Board (the ldquoValuation Proceduresrdquo) and in accordance with the 1940 Act A market
valuation generally means a valuation (i) obtained from an exchange an independent
pricing service (ldquoPricing Servicerdquo) or a major market maker (or dealer) or (ii) based on a
price quotation or other equivalent indication of value supplied by an exchange a Pricing
Service or a major market maker (or dealer) The information summarized below is
based on the Valuation Procedures as currently in effect however as noted above the
Valuation Procedures are amended from time to time and therefore such information is
subject to change
Certain securities including Floating Rate Debt Instruments in which the Fund
may invest will not be listed on any securities exchange or board of trade Such
securities will typically be bought and sold by institutional investors in individually
negotiated private transactions that function in many respects like an over-the-counter
SR-NASDAQ-2015-011 Amendment No 2 Page 47 of 64
secondary market although typically no formal market makers will exist Certain
securities particularly debt securities will have few or no trades or trade infrequently
and information regarding a specific security may not be widely available or may be
incomplete Accordingly determinations of the fair value of debt securities may be
based on infrequent and dated information Because there is less reliable objective data
available elements of judgment may play a greater role in valuation of debt securities
than for other types of securities Typically Floating Rate Debt Instruments and other
debt securities in which the Fund may invest (other than those described below) will be
valued using information provided by a Pricing Service Debt securities having a
remaining maturity of 60 days or less when purchased will be valued at cost adjusted for
amortization of premiums and accretion of discounts provided the Adviserrsquos pricing
committee (the ldquoPricing Committeerdquo) has determined that the use of amortized cost is an
appropriate reflection of fair value given market and issuer-specific conditions existing at
the time of the determination Overnight repurchase agreements will be valued at cost
and term repurchase agreements (ie those whose maturity exceeds seven days) will be
valued at the average of the bid quotations obtained daily from at least two recognized
dealers
Asset-backed and mortgage-backed securities will generally be valued by using a
Pricing Service If a Pricing Service does not cover a particular asset-backed or
mortgage-backed security or discontinues covering a particular asset-backed or
mortgage-backed security the security will be priced using broker quotes generally
provided by brokers that make or participate in markets in the security To derive values
Pricing Services and broker-dealers may use matrix pricing and valuation models as well
SR-NASDAQ-2015-011 Amendment No 2 Page 48 of 64
as recent market transactions for the same or similar assets As it deems appropriate the
Pricing Committee may determine that a Pricing Service price does not represent an
accurate value of an asset-backed or mortgage-backed security based on broker quotes it
receives a recent trade in the security by the Fund information from a portfolio manager
or other market information In the event that the Pricing Committee determines that the
Pricing Service price is unreliable or inaccurate based on such other information broker
quotes may be used Additionally if the Pricing Committee determines that the price of
an asset-backed or mortgage-backed security obtained from a Pricing Service and
available broker quotes is unreliable or inaccurate due to market conditions or other
reasons or if a Pricing Service price or broker quote is unavailable the security will be
valued using fair value pricing as described below
Equity securities listed on any exchange other than the Exchange will be valued at
the last sale price on the exchange on which they are principally traded on the business
day as of which such value is being determined Equity securities listed on the Exchange
will be valued at the official closing price on the business day as of which such value is
being determined If there has been no sale on such day or no official closing price in
the case of securities traded on the Exchange the securities will be valued using fair
value pricing as described below Equity securities traded on more than one securities
exchange will be valued at the last sale price or official closing price as applicable on
the business day as of which such value is being determined at the close of the exchange
representing the principal market for such securities
Exchange-traded options and futures contracts will be valued at the closing price
in the market where such contracts are principally traded
SR-NASDAQ-2015-011 Amendment No 2 Page 49 of 64
Certain securities including Floating Rate Debt Instruments in which the Fund
will invest will not be able to be priced by pre-established pricing methods Such
securities may be valued by the Trust Board or its delegate at fair value The use of fair
value pricing by the Fund will be governed by the Valuation Procedures and conducted in
accordance with the provisions of the 1940 Act Valuing the Fundrsquos securities using fair
value pricing will result in using prices for those securities that may differ from current
market valuations or official closing prices on the applicable exchange
Availability of Information
The Fundrsquos website (wwwftportfolioscom) which will be publicly available
prior to the public offering of Shares will include a form of the prospectus for the Fund
that may be downloaded The website will include the Sharesrsquo ticker CUSIP and
exchange information along with additional quantitative information updated on a daily
basis including for the Fund (1) daily trading volume the prior business dayrsquos reported
NAV and closing price mid-point of the bidask spread at the time of calculation of such
NAV (the ldquoBidAsk Pricerdquo)33 and a calculation of the premium and discount of the
BidAsk Price against the NAV and (2) data in chart format displaying the frequency
distribution of discounts and premiums of the daily BidAsk Price against the NAV
within appropriate ranges for each of the four previous calendar quarters On each
business day before commencement of trading in Shares in the Regular Market Session34
33 The BidAsk Price of the Fund will be determined using the mid-point of the highest bid and the lowest offer on the Exchange as of the time of calculation of the Fundrsquos NAV The records relating to BidAsk Prices will be retained by the Fund and its service providers
34 See Nasdaq Rule 4120(b)(4) (describing the three trading sessions on the Exchange (1) Pre-Market Session from 4 am to 930 am Eastern Time (2)
SR-NASDAQ-2015-011 Amendment No 2 Page 50 of 64
on the Exchange the Fund will disclose on its website the identities and quantities of the
portfolio of securities and other assets (the ldquoDisclosed Portfoliordquo as defined in Nasdaq
Rule 5735(c)(2)) held by the Fund that will form the basis for the Fundrsquos calculation of
NAV at the end of the business day 35 The Fundrsquos disclosure of derivative positions in
the Disclosed Portfolio will include information that market participants can use to value
these positions intraday On a daily basis the Fund will disclose on the Fundrsquos website
the following information regarding each portfolio holding as applicable to the type of
holding ticker symbol CUSIP number or other identifier if any a description of the
holding (including the type of holding) the identity of the security or other asset or
instrument underlying the holding if any for options the option strike price quantity
held (as measured by for example par value notional value or number of shares
contracts or units) maturity date if any coupon rate if any effective date if any market
value of the holding and percentage weighting of the holding in the Fundrsquos portfolio
The website information will be publicly available at no charge
In addition for the Fund an estimated value defined in Rule 5735(c)(3) as the
ldquoIntraday Indicative Valuerdquo that reflects an estimated intraday value of the Fundrsquos
Disclosed Portfolio will be disseminated Moreover the Intraday Indicative Value
Regular Market Session from 930 am to 4 pm or 415 pm Eastern Time and (3) Post-Market Session from 4 pm or 415 pm to 8 pm Eastern Time)
Under accounting procedures to be followed by the Fund trades made on the prior business day (ldquoTrdquo) will be booked and reflected in NAV on the current business day (ldquoT+1rdquo) Accordingly the Fund will be able to disclose at the beginning of the business day the portfolio that will form the basis for the NAV calculation at the end of the business day
35
SR-NASDAQ-2015-011 Amendment No 2 Page 51 of 64
available on the NASDAQ OMX Information LLC proprietary index data service36 will
be based upon the current value for the components of the Disclosed Portfolio and will be
updated and widely disseminated by one or more major market data vendors and broadly
displayed at least every 15 seconds during the Regular Market Session The Intraday
Indicative Value will be based on quotes and closing prices from the securitiesrsquo local
market and may not reflect events that occur subsequent to the local marketrsquos close
Premiums and discounts between the Intraday Indicative Value and the market price may
occur This should not be viewed as a ldquoreal timerdquo update of the NAV per Share of the
Fund which is calculated only once a day
The dissemination of the Intraday Indicative Value together with the Disclosed
Portfolio will allow investors to determine the value of the underlying portfolio of the
Fund on a daily basis and will provide a close estimate of that value throughout the
trading day
Investors will also be able to obtain the Fundrsquos Statement of Additional
Information (ldquoSAIrdquo) the Fundrsquos annual and semi-annual reports (together ldquoShareholder
Reportsrdquo) and its Form N-CSR and Form N-SAR filed twice a year The Fundrsquos SAI
and Shareholder Reports will be available free upon request from the Fund and those
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or
downloaded from the Commissionrsquos website at wwwsecgov Information regarding
Currently the NASDAQ OMX Global Index Data Service (ldquoGIDSrdquo) is the NASDAQ OMX global index data feed service offering real-time updates daily summary messages and access to widely followed indexes and Intraday Indicative Values for ETFs GIDS provides investment professionals with the daily information needed to track or trade NASDAQ OMX indexes listed ETFs or third-party partner indexes and ETFs
36
SR-NASDAQ-2015-011 Amendment No 2 Page 52 of 64
market price and trading volume of the Shares will be continually available on a real-time
basis throughout the day on brokersrsquo computer screens and other electronic services
Information regarding the previous dayrsquos closing price and trading volume information
for the Shares will be published daily in the financial section of newspapers Quotation
and last sale information for the Shares will be available via Nasdaq proprietary quote
and trade services as well as in accordance with the Unlisted Trading Privileges and the
Consolidated Tape Association (ldquoCTArdquo) plans for the Shares Quotation and last sale
information for the other ETFs in which the Fund will invest will be available via the
quote and trade services of their respective primary exchanges as well as in accordance
with the Unlisted Trading Privileges and the CTA plans as applicable Quotation and
last sale information for US exchange-traded options will be available via the Options
Price Reporting Authority Intraday executable price quotations on Floating Rate Debt
Instruments and other assets not traded on an exchange will be available from major
broker-dealer firms or market data vendors as well as from automated quotation systems
published or other public sources or online information services Additionally the Trade
Reporting and Compliance Engine (ldquoTRACErdquo) of the Financial Industry Regulatory
Authority (ldquoFINRArdquo) will be a source of price information for corporate bonds
privately-issued securities mortgage-backed securities and asset-backed securities to the
extent transactions in such securities are reported to TRACE37 For exchange-traded
Broker-dealers that are FINRA member firms have an obligation to report transactions in specified debt securities to TRACE to the extent required under applicable FINRA rules Generally such debt securities will have at issuance a maturity that exceeds one calendar year
37
SR-NASDAQ-2015-011 Amendment No 2 Page 53 of 64
assets intraday pricing information will be available directly from the applicable listing
exchange
Additional information regarding the Fund and the Shares including investment
strategies risks creation and redemption procedures fees Fund holdings disclosure
policies distributions and taxes will be included in the Registration Statement
Initial and Continued Listing
The Shares will be subject to Rule 5735 which sets forth the initial and continued
listing criteria applicable to Managed Fund Shares The Exchange represents that for
initial andor continued listing the Fund must be in compliance with Rule 10A-338 under
the Act A minimum of 100000 Shares will be outstanding at the commencement of
trading on the Exchange The Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the NAV and the
Disclosed Portfolio will be made available to all market participants at the same time
Trading Halts
With respect to trading halts the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading in the Shares of the Fund Nasdaq will
halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12) Trading may be
halted because of market conditions or for reasons that in the view of the Exchange
make trading in the Shares inadvisable These may include (1) the extent to which
trading is not occurring in the securities andor the other assets constituting the Disclosed
Portfolio of the Fund or (2) whether other unusual conditions or circumstances
See 17 CFR 24010A-3 38
SR-NASDAQ-2015-011 Amendment No 2 Page 54 of 64
detrimental to the maintenance of a fair and orderly market are present Trading in the
Shares also will be subject to Rule 5735(d)(2)(D) which sets forth circumstances under
which Shares of the Fund may be halted
Trading Rules
Nasdaq deems the Shares to be equity securities thus rendering trading in the
Shares subject to Nasdaqrsquos existing rules governing the trading of equity securities
Nasdaq will allow trading in the Shares from 400 am until 800 pm Eastern Time
The Exchange has appropriate rules to facilitate transactions in the Shares during all
trading sessions As provided in Nasdaq Rule 5735(b)(3) the minimum price variation
for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $001
Surveillance
The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws39 The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities laws
The surveillances referred to above generally focus on detecting securities trading
outside their normal patterns which could be indicative of manipulative or other violative
activity When such situations are detected surveillance analysis follows and
FINRA surveils trading on the Exchange pursuant to a regulatory services agreement The Exchange is responsible for FINRArsquos performance under this regulatory services agreement
39
SR-NASDAQ-2015-011 Amendment No 2 Page 55 of 64
investigations are opened where appropriate to review the behavior of all relevant
parties for all relevant trading violations
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 56 of 64
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
SR-NASDAQ-2015-011 Amendment No 2 Page 57 of 64
2 Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
SR-NASDAQ-2015-011 Amendment No 2 Page 58 of 64
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
SR-NASDAQ-2015-011 Amendment No 2 Page 59 of 64
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
SR-NASDAQ-2015-011 Amendment No 2 Page 60 of 64
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 61 of 64
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
SR-NASDAQ-2015-011 Amendment No 2 Page 62 of 64
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
B Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
C Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received From Members Participants or Others
Written comments were neither solicited nor received
III Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Within 45 days of the date of publication of this notice in the Federal Register or
within such longer period (i) as the Commission may designate up to 90 days of such date
if it finds such longer period to be appropriate and publishes its reasons for so finding or
(ii) as to which the Exchange consents the Commission shall (a) by order approve or
disapprove such proposed rule change or (b) institute proceedings to determine whether
the proposed rule change should be disapproved
SR-NASDAQ-2015-011 Amendment No 2 Page 63 of 64
IV Solicitation of Comments
Interested persons are invited to submit written data views and arguments
concerning the foregoing including whether the proposed rule change is consistent with
the Act Comments may be submitted by any of the following methods
Electronic comments
bull Use the Commissionrsquos Internet comment form
(httpwwwsecgovrulessroshtml) or
bull Send an e-mail to rule-commentssecgov Please include File Number
SR-NASDAQ-2015-011 on the subject line
Paper comments
bull Send paper comments in triplicate to Brent J Fields Secretary Securities and
Exchange Commission Station Place 100 F Street NE Washington DC
20549-9303
All submissions should refer to File Number SR-NASDAQ-2015-011 This file number
should be included on the subject line if e-mail is used To help the Commission process
and review your comments more efficiently please use only one method The
Commission will post all comments on the Commissionrsquos Internet website
httpwwwsecgovrulessroshtml
Copies of the submission all subsequent amendments all written statements with
respect to the proposed rule change that are filed with the Commission and all written
communications relating to the proposed rule change between the Commission and any
person other than those that may be withheld from the public in accordance with the
provisions of 5 USC 552 will be available for website viewing and printing in the
Commissionrsquos Public Reference Room 100 F Street NE Washington DC 20549 on
SR-NASDAQ-2015-011 Amendment No 2 Page 64 of 64
official business days between the hours of 1000 am and 300 pm Copies of the filing
also will be available for inspection and copying at the principal office of Nasdaq All
comments received will be posted without change the Commission does not edit
personal identifying information from submissions You should submit only information
that you wish to make available publicly
All submissions should refer to File Number SR-NASDAQ-2015-011 and should
be submitted on or before [insert date 21 days from publication in the Federal Register]
For the Commission by the Division of Trading and Markets pursuant to
delegated authority41
Kevin M OrsquoNeill Deputy Secretary
17 CFR 20030-3(a)(12) 41
SR-NASDAQ-2015-011 Amendment No 2 Page 22 of 64
Additional information regarding the Fund and the Shares including investment
strategies risks creation and redemption procedures fees Fund holdings disclosure
policies distributions and taxes will be included in the Registration Statement
Initial and Continued Listing
The Shares will be subject to Rule 5735 which sets forth the initial and continued
listing criteria applicable to Managed Fund Shares The Exchange represents that for
initial andor continued listing the Fund must be in compliance with Rule 10A-338 under
the Act A minimum of 100000 Shares will be outstanding at the commencement of
trading on the Exchange The Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the NAV and the
Disclosed Portfolio will be made available to all market participants at the same time
Trading Halts
With respect to trading halts the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading in the Shares of the Fund Nasdaq will
halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12) Trading may be
halted because of market conditions or for reasons that in the view of the Exchange
make trading in the Shares inadvisable These may include (1) the extent to which
trading is not occurring in the securities andor the other assets constituting the Disclosed
Portfolio of the Fund or (2) whether other unusual conditions or circumstances
detrimental to the maintenance of a fair and orderly market are present Trading in the
See 17 CFR 24010A-3 38
SR-NASDAQ-2015-011 Amendment No 2 Page 23 of 64
Shares also will be subject to Rule 5735(d)(2)(D) which sets forth circumstances under
which Shares of the Fund may be halted
Trading Rules
Nasdaq deems the Shares to be equity securities thus rendering trading in the
Shares subject to Nasdaqrsquos existing rules governing the trading of equity securities
Nasdaq will allow trading in the Shares from 400 am until 800 pm Eastern Time
The Exchange has appropriate rules to facilitate transactions in the Shares during all
trading sessions As provided in Nasdaq Rule 5735(b)(3) the minimum price variation
for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $001
Surveillance
The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws39 The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities laws
The surveillances referred to above generally focus on detecting securities trading
outside their normal patterns which could be indicative of manipulative or other violative
activity When such situations are detected surveillance analysis follows and
investigations are opened where appropriate to review the behavior of all relevant
parties for all relevant trading violations
FINRA surveils trading on the Exchange pursuant to a regulatory services agreement The Exchange is responsible for FINRArsquos performance under this regulatory services agreement
39
SR-NASDAQ-2015-011 Amendment No 2 Page 24 of 64
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 25 of 64
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
b Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
SR-NASDAQ-2015-011 Amendment No 2 Page 26 of 64
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
SR-NASDAQ-2015-011 Amendment No 2 Page 27 of 64
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
SR-NASDAQ-2015-011 Amendment No 2 Page 28 of 64
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
SR-NASDAQ-2015-011 Amendment No 2 Page 29 of 64
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
SR-NASDAQ-2015-011 Amendment No 2 Page 30 of 64
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
SR-NASDAQ-2015-011 Amendment No 2 Page 31 of 64
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
4 Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
5 Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received from Members Participants or Others
Written comments were neither solicited nor received
6 Extension of Time Period for Commission Action
The Exchange does not consent at this time to an extension of any time period for
Commission action
7 Basis for Summary Effectiveness Pursuant to Section 19(b)(3) or for Accelerated Effectiveness Pursuant to Section 19(b)(2)
Not applicable
8 Proposed Rule Change Based on Rules of Another Self-Regulatory Organization or of the Commission
Not applicable
9 Security-Based Swap Submissions Filed Pursuant to Section 3C of the Act
Not applicable
SR-NASDAQ-2015-011 Amendment No 2 Page 32 of 64
10 Advance Notices Filed Pursuant to Section 806(e) of the Payment Clearing and Settlement Supervision Act
Not applicable
11 Exhibits
1 Completed notice of proposed rule change for publication in the Federal
Register
SR-NASDAQ-2015-011 Amendment No 2 Page 33 of 64
EXHIBIT 1
SECURITIES AND EXCHANGE COMMISSION (Release No 34shy File No SR-NASDAQ-2015-011)
April __ 2015
Self-Regulatory Organizations The NASDAQ Stock Market LLC Notice of Filing of Proposed Rule Change Relating to the Listing and Trading of the Shares of the First Trust Strategic Floating Rate ETF of First Trust Exchange-Traded Fund IV
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (ldquoActrdquo)1 and
Rule 19b-4 thereunder2 notice is hereby given that on February 12 2015 The NASDAQ
Stock Market LLC (ldquoNasdaqrdquo or the ldquoExchangerdquo) filed with the Securities and Exchange
Commission (ldquoCommissionrdquo) the proposed rule change as described in in Items I II and
III below which Items have been prepared by Nasdaq On April 6 2015 Nasdaq filed
Amendment No 1 which replaced the text of the original filing in its entirety On April
15 2015 Nasdaq filed Amendment No 2 which replaced the text of the original filing in
its entirety The Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons
I Self-Regulatory Organizationrsquos Statement of the Terms of Substance of the Proposed Rule Change
Nasdaq proposes to list and trade the shares of the First Trust Strategic Floating
Rate ETF (the ldquoFundrdquo) of the First Trust Strategic Floating Rate ETF (the ldquoFundrdquo) of
First Trust Exchange-Traded Fund IV (the ldquoTrustrdquo) under Nasdaq Rule 5735 (ldquoManaged
1 15 USC 78s(b)(1)
2 17 CFR 24019b-4
SR-NASDAQ-2015-011 Amendment No 2 Page 34 of 64
Fund Sharesrdquo)3 The shares of the Fund are collectively referred to herein as the
ldquoSharesrdquo
The text of the proposed rule change is available at
httpnasdaqcchwallstreetcom at Nasdaqrsquos principal office and at the Commissionrsquos
Public Reference Room
II Self-Regulatory Organizationrsquos Statement of the Purpose of and Statutory Basis for the Proposed Rule Change
In its filing with the Commission Nasdaq included statements concerning the
purpose of and basis for the proposed rule change The text of these statements may be
examined at the places specified in Item IV below Nasdaq has prepared summaries set
forth in Sections A B and C below of the most significant aspects of such statements
A Self-Regulatory Organizationrsquos Statement of the Purpose of and Statutory Basis for the Proposed Rule Change
1 Purpose
The Exchange proposes to list and trade the Shares of the Fund under Nasdaq
Rule 5735 which governs the listing and trading of Managed Fund Shares4 on the
3 The Commission approved Nasdaq Rule 5735 in Securities Exchange Act Release No 57962 (June 13 2008) 73 FR 35175 (June 20 2008) (SR-NASDAQ-2008shy039) There are already multiple actively-managed funds listed on the Exchange see eg Securities Exchange Act Release Nos 69464 (April 26 2013) 78 FR 25774 (May 2 2013) (SR-NASDAQ-2013-036) (order approving listing and trading of First Trust Senior Loan Fund) 68972 (February 22 2013) 78 FR 13721 (February 28 2013) (SR-NASDAQ-2012-147) (order approving listing and trading of First Trust High Yield LongShort ETF) 66489 (February 29 2012) 77 FR 13379 (March 6 2012) (SR-NASDAQ-2012-004) (order approving listing and trading of WisdomTree Emerging Markets Corporate Bond Fund) The Exchange believes the proposed rule change raises no significant issues not previously addressed in those prior Commission orders
4 A Managed Fund Share is a security that represents an interest in an investment company registered under the Investment Company Act of 1940 (15 USC 80ashy
SR-NASDAQ-2015-011 Amendment No 2 Page 35 of 64
Exchange The Fund will be an actively-managed exchange-traded fund (ldquoETFrdquo) The
Shares will be offered by the Trust which was established as a Massachusetts business
trust on September 15 20105 The Trust is registered with the Commission as an
investment company and has filed a registration statement on Form N-1A (ldquoRegistration
Statementrdquo) with the Commission6 The Fund will be a series of the Trust The Fund
intends to qualify each year as a regulated investment company (ldquoRICrdquo) under
Subchapter M of the Internal Revenue Code of 1986 as amended
First Trust Advisors LP will be the investment adviser (ldquoAdviserrdquo) to the Fund
First Trust Portfolios LP (the ldquoDistributorrdquo) will be the principal underwriter and
distributor of the Fundrsquos Shares The Bank of New York Mellon Corporation (ldquoBNYrdquo)
will act as the administrator accounting agent custodian and transfer agent to the Fund
1) (the ldquo1940 Actrdquo) organized as an open-end investment company or similar entity that invests in a portfolio of securities selected by its investment adviser consistent with its investment objectives and policies In contrast an open-end investment company that issues Index Fund Shares listed and traded on the Exchange under Nasdaq Rule 5705 seeks to provide investment results that correspond generally to the price and yield performance of a specific foreign or domestic stock index fixed income securities index or combination thereof
5 The Commission has issued an order upon which the Trust may rely granting certain exemptive relief under the 1940 Act See Investment Company Act Release No 30029 (April 10 2012) (File No 812-13795) (the ldquoExemptive Reliefrdquo) In addition the Commission has issued no-action relief upon which the Trust may rely pertaining to the Fundrsquos ability to invest in derivatives notwithstanding certain representations in the application for the Exemptive Relief See Commission No-Action Letter (December 6 2012)
6 See Post-Effective Amendment No 104 to Registration Statement on Form N-1A for the Trust dated January 29 2015 (File Nos 333-174332 and 811-22559) The descriptions of the Fund and the Shares contained herein are based in part on information in the Registration Statement
7
SR-NASDAQ-2015-011 Amendment No 2 Page 36 of 64
Paragraph (g) of Rule 5735 provides that if the investment adviser to the
investment company issuing Managed Fund Shares is affiliated with a broker-dealer
such investment adviser shall erect a ldquofire wallrdquo between the investment adviser and the
broker-dealer with respect to access to information concerning the composition andor
changes to such investment company portfolio7 In addition paragraph (g) further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio Rule 5735(g) is similar
to Nasdaq Rule 5705(b)(5)(A)(i) however paragraph (g) in connection with the
establishment of a ldquofire wallrdquo between the investment adviser and the broker-dealer
reflects the applicable open-end fundrsquos portfolio not an underlying benchmark index as
is the case with index-based funds The Adviser is not a broker-dealer although it is
affiliated with the Distributor a broker-dealer The Adviser has implemented a fire wall
An investment adviser to an open-end fund is required to be registered under the Investment Advisers Act of 1940 (the ldquoAdvisers Actrdquo) As a result the Adviser and its related personnel are subject to the provisions of Rule 204A-1 under the Advisers Act relating to codes of ethics This Rule requires investment advisers to adopt a code of ethics that reflects the fiduciary nature of the relationship to clients as well as compliance with other applicable securities laws Accordingly procedures designed to prevent the communication and misuse of non-public information by an investment adviser must be consistent with Rule 204A-1 under the Advisers Act In addition Rule 206(4)-7 under the Advisers Act makes it unlawful for an investment adviser to provide investment advice to clients unless such investment adviser has (i) adopted and implemented written policies and procedures reasonably designed to prevent violation by the investment adviser and its supervised persons of the Advisers Act and the Commission rules adopted thereunder (ii) implemented at a minimum an annual review regarding the adequacy of the policies and procedures established pursuant to subparagraph (i) above and the effectiveness of their implementation and (iii) designated an individual (who is a supervised person) responsible for administering the policies and procedures adopted under subparagraph (i) above
8
SR-NASDAQ-2015-011 Amendment No 2 Page 37 of 64
with respect to its broker-dealer affiliate regarding access to information concerning the
composition andor changes to the portfolio In addition personnel who make decisions
on the Fundrsquos portfolio composition will be subject to procedures designed to prevent the
use and dissemination of material non-public information regarding the Fundrsquos portfolio
In the event (a) the Adviser becomes or becomes newly affiliated with a broker-dealer
or (b) any new adviser or sub-adviser is a registered broker-dealer or becomes affiliated
with another broker-dealer it will implement a fire wall with respect to its relevant
personnel andor such broker-dealer affiliate as applicable regarding access to
information concerning the composition andor changes to the portfolio and will be
subject to procedures designed to prevent the use and dissemination of material
non-public information regarding such portfolio The Fund does not currently intend to
use a sub-adviser
First Trust Strategic Floating Rate ETF
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions8 at least 80 of its
The term ldquounder normal market conditionsrdquo as used herein includes but is not limited to the absence of adverse market economic political or other conditions including extreme volatility or trading halts in the fixed income markets or the financial markets generally operational issues causing dissemination of inaccurate market information or force majeure type events such as systems failure natural or man-made disaster act of God armed conflict act of terrorism riot or labor disruption or any similar intervening circumstance For temporary defensive purposes during the initial invest-up period and during periods of high cash inflows or outflows the Fund may depart from its principal investment strategies for example it may hold a higher than normal proportion of its assets in cash During such periods the Fund may not be able to achieve its investment objective The Fund may adopt a defensive strategy when the Adviser believes securities in which the Fund normally invests have elevated risks due to political or economic factors and in other extraordinary circumstances
SR-NASDAQ-2015-011 Amendment No 2 Page 38 of 64
net assets in a portfolio of the following types of floating-rate9 debt instruments issued by
US and non-US public- and private-sector entities floating-rate corporate10 and
government bonds and notes floating-rate agency securities 11 floating-rate instruments
of non-US issuers floating-rate privately-issued securities 12 floating-rate asset-backed
securities 13 floating-rate mortgage-backed securities14 floating-rate loans 15 and
9 For the avoidance of doubt the term ldquofloating-raterdquo shall also include similar terms such as ldquovariable-raterdquo and ldquoadjustable-raterdquo
10 The Adviser expects that under normal market conditions generally for a corporate bond to be considered as an eligible investment after taking into account such an investment at least 75 of the Fundrsquos net assets that are invested in floating-rate corporate bonds and as described below fixed-rate corporate bonds (in the aggregate) will be comprised of corporate bonds that have at the time of original issuance $100 million or more par amount outstanding
11 ldquoAgency securitiesrdquo for these purposes generally includes securities issued by the following entities Government National Mortgage Association (Ginnie Mae) Federal National Mortgage Association (Fannie Mae) Federal Home Loan Banks (FHLBanks) Federal Home Loan Mortgage Corporation (Freddie Mac) Farm Credit System (FCS) Farm Credit Banks (FCBanks) Student Loan Marketing Association (Sallie Mae) Resolution Funding Corporation (REFCORP) Financing Corporation (FICO) and the Farm Credit System (FCS) Financial Assistance Corporation (FAC) Agency securities can include but are not limited to mortgage-backed securities
12 ldquoPrivately-issued securitiesrdquo for these purposes generally includes Rule 144A securities other than mortgage-backed Rule 144A securities Under normal market conditions privately-issued securities will have at the time of original issuance $100 million or more principal amount outstanding to be considered eligible investments
13 Asset-backed securities are securities that are backed by a pool of assets The Fund currently intends to invest in asset-backed securities that are consumer asset-backed securities
14 Mortgage-backed securities which are securities that directly or indirectly represent a participation in or are secured by and payable from mortgage loans on real property will consist of (1) residential mortgage-backed securities (ldquoRMBSrdquo) (2) commercial mortgage-backed securities (ldquoCMBSrdquo) (3) stripped mortgage-backed securities (ldquoSMBSrdquo) which are mortgage-backed securities
SR-NASDAQ-2015-011 Amendment No 2 Page 39 of 64
investment companies16 (including investment companies advised by the Adviser) that
invest primarily in the foregoing types of debt instruments17 (collectively ldquoFloating Rate
Debt Instrumentsrdquo)
where mortgage payments are divided between paying the loanrsquos principal and paying the loanrsquos interest (4) collateralized mortgage obligations (ldquoCMOsrdquo) and real estate mortgage investment conduits (ldquoREMICsrdquo) which are mortgage-backed securities that are divided into multiple classes with each class being entitled to a different share of the principal and interest payments received from the pool of underlying assets
15 The floating-rate loans in which the Fund will invest will represent amounts borrowed by companies or other entities from banks and other lenders and a significant portion of such floating-rate loans may be rated below investment grade or unrated Floating-rate loans held by the Fund may be senior or subordinate obligations of the borrower and may or may not be secured by collateral First lien senior secured floating-rate loans are referred to herein as ldquosenior loansrdquo Floating-rate loans that are not senior loans (ie unsecured floating-rate loans and secured floating-rate loans that are not first lien floating-rate loans) are referred to herein as ldquojunior loansrdquo The Fund will generally invest in floating-rate loans that the Adviser deems to be liquid with readily available prices notwithstanding the foregoing the Fund may invest in floating-rate loans that are deemed illiquid so long as the Fund complies with the 15 limitation on investments of its net assets in illiquid assets described below under ldquoInvestment Restrictionsrdquo
16 The Fund currently anticipates investing only in registered open-end investment companies that are listed and traded in the US on registered exchanges (ie other ETFs) An ETF is an investment company registered under the 1940 Act that holds a portfolio of securities Many ETFs are designed to track the performance of a securities index including industry sector country and region indexes The Fund may invest in the securities of ETFs in excess of the limits imposed under the 1940 Act pursuant to exemptive orders obtained by other ETFs and their sponsors from the Commission In addition the Fund may invest in the securities of certain investment companies in excess of the limits imposed under the 1940 Act pursuant to an exemptive order obtained by the Trust and the Adviser from the Commission See Investment Company Act Release No 30377 (February 5 2013) (File No 812-13895) The ETFs in which the Fund may invest include Index Fund Shares (as described in Nasdaq Rule 5705) Portfolio Depository Receipts (as described in Nasdaq Rule 5705) and Managed Fund Shares (as described in Nasdaq Rule 5735) While the Fund may invest in inverse ETFs the Fund will not invest in leveraged or inverse leveraged (eg 2X or -3X) ETFs
SR-NASDAQ-2015-011 Amendment No 2 Page 40 of 64
At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade To be considered
ldquoinvestment graderdquo under normal market conditions rated Floating Rate Debt
Instruments will carry at the time of purchase a rating in the highest four rating
categories of at least one nationally recognized statistical ratings organization
(ldquoNRSROrdquo) (eg BBB- or higher by Standard amp Poorrsquos Ratings Services (ldquoSampPrdquo)
andor Fitch Ratings (ldquoFitchrdquo) or Baa3 or higher by Moodyrsquos Investors Service Inc
(ldquoMoodyrsquosrdquo)18 For unrated securities to be considered ldquoinvestment graderdquo under normal
market conditions such securities will be determined at the time of purchase to be of
comparable quality19 by the Adviser The Fund may invest up to 35 of its net assets in
securities that are at the time of investment rated below investment grade by each
NRSRO rating such securities (or securities that are unrated and determined by the
17 The liquidity of a security especially in the case of asset-backed and mortgage-backed securities will be a substantial factor in the Fundrsquos security selection process Consistent with the discussion below under ldquoInvestment Restrictionsrdquo the Fund will not purchase any Floating Rate Debt Instruments (including asset-backed securities and mortgage-backed securities) that in the Adviserrsquos opinion are illiquid if as a result more than 15 of the value of the Fundrsquos net assets will be invested in illiquid assets
18 For the avoidance of doubt if a security is rated by multiple NRSROs and receives different ratings the Fund will treat the security as being rated in the highest rating category received from an NRSRO
19 Comparable quality of unrated securities will be determined by the Adviser based on fundamental credit analysis of the unrated security and comparable NRSRO-rated securities On a best efforts basis the Adviser will attempt to make a rating determination based on publicly available data In making a ldquocomparable qualityrdquo determination the Adviser may consider for example whether the issuer of the security has issued other rated securities the nature and provisions of the relevant security whether the obligations under the relevant security are guaranteed by another entity and the rating of such guarantor (if any) relevant cash flows macroeconomic analysis andor sector or industry analysis
SR-NASDAQ-2015-011 Amendment No 2 Page 41 of 64
Adviser to be of comparable quality) commonly referred to as ldquohigh yieldrdquo or ldquojunkrdquo
bonds If subsequent to purchase by the Fund a security held by the Fund experiences a
decline in credit quality and falls below investment grade the Fund may continue to hold
the security and it will not cause the Fund to violate the 35 investment limitation
however the security will be taken into account for purposes of determining whether
purchases of additional securities will cause the Fund to violate such limitation
The Fund will limit its investments in asset-backed securities (excluding agency
mortgage-backed securities) and non-agency mortgage-backed securities (in the
aggregate) to 20 of its net assets20 In addition the Fund will limit its investments in
junior loans to 20 of its net assets
The Fund will hold debt securities (including in the aggregate Floating Rate
Debt Instruments and the fixed-rate debt securities described below) of at least 13
non-affiliated issuers
Other Investments
Under normal market conditions the Fund will invest primarily in the Floating
Rate Debt Instruments described above to meet its investment objective In addition the
Fund may invest up to 20 of its net assets in the following types of fixed-rate debt
securities corporate21 and government bonds and notes agency securities22 instruments
20 For the avoidance of doubt there is no limitation on the Fundrsquos investments in agency mortgage-backed securities
21 See footnote 10 above
22 See footnote 11 above
SR-NASDAQ-2015-011 Amendment No 2 Page 42 of 64
of non-US issuers in developed markets privately-issued securities 23 asset-backed
securities 24 mortgage-backed securities 25 municipal bonds money market securities26
and investment companies27 (including investment companies advised by the Adviser)
that invest primarily in the foregoing types of debt securities
Further to pursue its investment objective the Fund may invest up to 20 of the
value of its net assets in exchange-listed options on US Treasury futures contracts and
exchange-listed US Treasury futures contracts28 The use of these derivative
transactions may allow the Fund to obtain net long or short exposures to selected interest
rates These derivatives may also be used to hedge risks including interest rate risks and
credit risks associated with the Fundrsquos portfolio investments The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
23 See footnote 12 above
24 See footnote 13 above
25 See footnote 14 above
26 ldquoMoney market securitiesrdquo for these purposes generally includes short-term high-quality obligations issued or guaranteed by the US Treasury or the agencies or instrumentalities of the US government short-term high-quality securities issued or guaranteed by non-US governments agencies and instrumentalities repurchase agreements commercial paper (both asset-backed and non-assetshybacked) and deposits and other obligations of US and non-US banks and financial institutions
27 See footnote 16 above
28 At least 90 of the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be invested in instruments that trade in markets that are members of the Intermarket Surveillance Group (ldquoISGrdquo) (see footnote 40 below) or are parties to a comprehensive surveillance sharing agreement with the Exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 43 of 64
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index
Investment Restrictions
The Fund will not invest 25 or more of the value of its total assets in securities
of issuers in any one industry This restriction does not apply to (a) obligations issued or
guaranteed by the US government its agencies or instrumentalities or (b) securities of
other investment companies29
The Fund may hold up to an aggregate amount of 15 of its net assets in illiquid
assets (calculated at the time of investment) including Rule 144A securities deemed
illiquid by the Adviser30 The Fund will monitor its portfolio liquidity on an ongoing
basis to determine whether in light of current circumstances an adequate level of
liquidity is being maintained and will consider taking appropriate steps in order to
maintain adequate liquidity if through a change in values net assets or other
circumstances more than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid
assets include securities subject to contractual or other restrictions on resale and other
29 See Form N-1A Item 9 The Commission has taken the position that a fund is concentrated if it invests more than 25 of the value of its total assets in any one industry See eg Investment Company Act Release No 9011 (October 30 1975) 40 FR 54241 (November 21 1975)
30 In reaching liquidity decisions the Adviser may consider the following factors the frequency of trades and quotes for the security the number of dealers wishing to purchase or sell the security and the number of other potential purchasers dealer undertakings to make a market in the security and the nature of the security and the nature of the marketplace in which it trades (eg the time needed to dispose of the security the method of soliciting offers and the mechanics of transfer)
SR-NASDAQ-2015-011 Amendment No 2 Page 44 of 64
instruments that lack readily available markets as determined in accordance with
Commission staff guidance31
The Fund will not invest in non-US equity securities
Creation and Redemption of Shares
The Fund will issue and redeem Shares on a continuous basis at net asset value
(ldquoNAVrdquo)32 only in large blocks of Shares (ldquoCreation Unitsrdquo) in transactions with
authorized participants generally including broker-dealers and large institutional
investors (ldquoAuthorized Participantsrdquo) Creation Units generally will consist of 50000
Shares although this may change from time to time Creation Units however are not
expected to consist of less than 50000 Shares As described in the Registration
Statement and consistent with the Exemptive Relief the Fund will issue and redeem
Creation Units in exchange for an in-kind portfolio of instruments andor cash in lieu of
31 The Commission has stated that long-standing Commission guidelines have required open-end funds to hold no more than 15 of their net assets in illiquid securities and other illiquid assets See Investment Company Act Release No 28193 (March 11 2008) 73 FR 14618 (March 18 2008) footnote 34 See also Investment Company Act Release No 5847 (October 21 1969) 35 FR 19989 (December 31 1970) (Statement Regarding ldquoRestricted Securitiesrdquo) Investment Company Act Release No 18612 (March 12 1992) 57 FR 9828 (March 20 1992) (Revisions of Guidelines to Form N-1A) A fundrsquos portfolio security is illiquid if it cannot be disposed of in the ordinary course of business within seven days at approximately the value ascribed to it by the fund See Investment Company Act Release No 14983 (March 12 1986) 51 FR 9773 (March 21 1986) (adopting amendments to Rule 2a-7 under the 1940 Act) Investment Company Act Release No 17452 (April 23 1990) 55 FR 17933 (April 30 1990) (adopting Rule 144A under the Securities Act of 1933)
32 The NAV of the Fundrsquos Shares generally will be calculated once daily Monday through Friday as of the close of regular trading on the New York Stock Exchange generally 400 pm Eastern Time (the ldquoNAV Calculation Timerdquo) NAV per Share will be calculated by dividing the Fundrsquos net assets by the number of Fund Shares outstanding For more information regarding the valuation of Fund investments in calculating the Fundrsquos NAV see the Registration Statement
SR-NASDAQ-2015-011 Amendment No 2 Page 45 of 64
such instruments (the ldquoCreation Basketrdquo) In addition if there is a difference between the
NAV attributable to a Creation Unit and the market value of the Creation Basket
exchanged for the Creation Unit the party conveying instruments with the lower value
will pay to the other an amount in cash equal to the difference (referred to as the ldquoCash
Componentrdquo)
Creations and redemptions must be made by or through an Authorized Participant
that has executed an agreement that has been agreed to by the Distributor and BNY with
respect to creations and redemptions of Creation Units All standard orders to create
Creation Units must be received by the transfer agent no later than the closing time of the
regular trading session on the New York Stock Exchange (ordinarily 400 pm Eastern
Time) (the ldquoClosing Timerdquo) in each case on the date such order is placed in order for the
creation of Creation Units to be effected based on the NAV of Shares as next determined
on such date after receipt of the order in proper form Shares may be redeemed only in
Creation Units at their NAV next determined after receipt not later than the Closing Time
of a redemption request in proper form by the Fund through the transfer agent and only
on a business day
The Fundrsquos custodian through the National Securities Clearing Corporation will
make available on each business day prior to the opening of business of the Exchange
the list of the names and quantities of the instruments comprising the Creation Basket as
well as the estimated Cash Component (if any) for that day The published Creation
Basket will apply until a new Creation Basket is announced on the following business
day prior to commencement of trading in the Shares
SR-NASDAQ-2015-011 Amendment No 2 Page 46 of 64
Net Asset Value
The Fundrsquos NAV will be determined as of the close of trading (normally
400 pm Eastern Time) on each day the New York Stock Exchange is open for
business NAV will be calculated for the Fund by taking the market price of the Fundrsquos
total assets including interest or dividends accrued but not yet collected less all
liabilities and dividing such amount by the total number of Shares outstanding The
result rounded to the nearest cent will be the NAV per Share All valuations will be
subject to review by the Board of Trustees of the Trust (ldquoTrust Boardrdquo) or its delegate
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with valuation procedures (which may be revised from time to time) adopted by the Trust
Board (the ldquoValuation Proceduresrdquo) and in accordance with the 1940 Act A market
valuation generally means a valuation (i) obtained from an exchange an independent
pricing service (ldquoPricing Servicerdquo) or a major market maker (or dealer) or (ii) based on a
price quotation or other equivalent indication of value supplied by an exchange a Pricing
Service or a major market maker (or dealer) The information summarized below is
based on the Valuation Procedures as currently in effect however as noted above the
Valuation Procedures are amended from time to time and therefore such information is
subject to change
Certain securities including Floating Rate Debt Instruments in which the Fund
may invest will not be listed on any securities exchange or board of trade Such
securities will typically be bought and sold by institutional investors in individually
negotiated private transactions that function in many respects like an over-the-counter
SR-NASDAQ-2015-011 Amendment No 2 Page 47 of 64
secondary market although typically no formal market makers will exist Certain
securities particularly debt securities will have few or no trades or trade infrequently
and information regarding a specific security may not be widely available or may be
incomplete Accordingly determinations of the fair value of debt securities may be
based on infrequent and dated information Because there is less reliable objective data
available elements of judgment may play a greater role in valuation of debt securities
than for other types of securities Typically Floating Rate Debt Instruments and other
debt securities in which the Fund may invest (other than those described below) will be
valued using information provided by a Pricing Service Debt securities having a
remaining maturity of 60 days or less when purchased will be valued at cost adjusted for
amortization of premiums and accretion of discounts provided the Adviserrsquos pricing
committee (the ldquoPricing Committeerdquo) has determined that the use of amortized cost is an
appropriate reflection of fair value given market and issuer-specific conditions existing at
the time of the determination Overnight repurchase agreements will be valued at cost
and term repurchase agreements (ie those whose maturity exceeds seven days) will be
valued at the average of the bid quotations obtained daily from at least two recognized
dealers
Asset-backed and mortgage-backed securities will generally be valued by using a
Pricing Service If a Pricing Service does not cover a particular asset-backed or
mortgage-backed security or discontinues covering a particular asset-backed or
mortgage-backed security the security will be priced using broker quotes generally
provided by brokers that make or participate in markets in the security To derive values
Pricing Services and broker-dealers may use matrix pricing and valuation models as well
SR-NASDAQ-2015-011 Amendment No 2 Page 48 of 64
as recent market transactions for the same or similar assets As it deems appropriate the
Pricing Committee may determine that a Pricing Service price does not represent an
accurate value of an asset-backed or mortgage-backed security based on broker quotes it
receives a recent trade in the security by the Fund information from a portfolio manager
or other market information In the event that the Pricing Committee determines that the
Pricing Service price is unreliable or inaccurate based on such other information broker
quotes may be used Additionally if the Pricing Committee determines that the price of
an asset-backed or mortgage-backed security obtained from a Pricing Service and
available broker quotes is unreliable or inaccurate due to market conditions or other
reasons or if a Pricing Service price or broker quote is unavailable the security will be
valued using fair value pricing as described below
Equity securities listed on any exchange other than the Exchange will be valued at
the last sale price on the exchange on which they are principally traded on the business
day as of which such value is being determined Equity securities listed on the Exchange
will be valued at the official closing price on the business day as of which such value is
being determined If there has been no sale on such day or no official closing price in
the case of securities traded on the Exchange the securities will be valued using fair
value pricing as described below Equity securities traded on more than one securities
exchange will be valued at the last sale price or official closing price as applicable on
the business day as of which such value is being determined at the close of the exchange
representing the principal market for such securities
Exchange-traded options and futures contracts will be valued at the closing price
in the market where such contracts are principally traded
SR-NASDAQ-2015-011 Amendment No 2 Page 49 of 64
Certain securities including Floating Rate Debt Instruments in which the Fund
will invest will not be able to be priced by pre-established pricing methods Such
securities may be valued by the Trust Board or its delegate at fair value The use of fair
value pricing by the Fund will be governed by the Valuation Procedures and conducted in
accordance with the provisions of the 1940 Act Valuing the Fundrsquos securities using fair
value pricing will result in using prices for those securities that may differ from current
market valuations or official closing prices on the applicable exchange
Availability of Information
The Fundrsquos website (wwwftportfolioscom) which will be publicly available
prior to the public offering of Shares will include a form of the prospectus for the Fund
that may be downloaded The website will include the Sharesrsquo ticker CUSIP and
exchange information along with additional quantitative information updated on a daily
basis including for the Fund (1) daily trading volume the prior business dayrsquos reported
NAV and closing price mid-point of the bidask spread at the time of calculation of such
NAV (the ldquoBidAsk Pricerdquo)33 and a calculation of the premium and discount of the
BidAsk Price against the NAV and (2) data in chart format displaying the frequency
distribution of discounts and premiums of the daily BidAsk Price against the NAV
within appropriate ranges for each of the four previous calendar quarters On each
business day before commencement of trading in Shares in the Regular Market Session34
33 The BidAsk Price of the Fund will be determined using the mid-point of the highest bid and the lowest offer on the Exchange as of the time of calculation of the Fundrsquos NAV The records relating to BidAsk Prices will be retained by the Fund and its service providers
34 See Nasdaq Rule 4120(b)(4) (describing the three trading sessions on the Exchange (1) Pre-Market Session from 4 am to 930 am Eastern Time (2)
SR-NASDAQ-2015-011 Amendment No 2 Page 50 of 64
on the Exchange the Fund will disclose on its website the identities and quantities of the
portfolio of securities and other assets (the ldquoDisclosed Portfoliordquo as defined in Nasdaq
Rule 5735(c)(2)) held by the Fund that will form the basis for the Fundrsquos calculation of
NAV at the end of the business day 35 The Fundrsquos disclosure of derivative positions in
the Disclosed Portfolio will include information that market participants can use to value
these positions intraday On a daily basis the Fund will disclose on the Fundrsquos website
the following information regarding each portfolio holding as applicable to the type of
holding ticker symbol CUSIP number or other identifier if any a description of the
holding (including the type of holding) the identity of the security or other asset or
instrument underlying the holding if any for options the option strike price quantity
held (as measured by for example par value notional value or number of shares
contracts or units) maturity date if any coupon rate if any effective date if any market
value of the holding and percentage weighting of the holding in the Fundrsquos portfolio
The website information will be publicly available at no charge
In addition for the Fund an estimated value defined in Rule 5735(c)(3) as the
ldquoIntraday Indicative Valuerdquo that reflects an estimated intraday value of the Fundrsquos
Disclosed Portfolio will be disseminated Moreover the Intraday Indicative Value
Regular Market Session from 930 am to 4 pm or 415 pm Eastern Time and (3) Post-Market Session from 4 pm or 415 pm to 8 pm Eastern Time)
Under accounting procedures to be followed by the Fund trades made on the prior business day (ldquoTrdquo) will be booked and reflected in NAV on the current business day (ldquoT+1rdquo) Accordingly the Fund will be able to disclose at the beginning of the business day the portfolio that will form the basis for the NAV calculation at the end of the business day
35
SR-NASDAQ-2015-011 Amendment No 2 Page 51 of 64
available on the NASDAQ OMX Information LLC proprietary index data service36 will
be based upon the current value for the components of the Disclosed Portfolio and will be
updated and widely disseminated by one or more major market data vendors and broadly
displayed at least every 15 seconds during the Regular Market Session The Intraday
Indicative Value will be based on quotes and closing prices from the securitiesrsquo local
market and may not reflect events that occur subsequent to the local marketrsquos close
Premiums and discounts between the Intraday Indicative Value and the market price may
occur This should not be viewed as a ldquoreal timerdquo update of the NAV per Share of the
Fund which is calculated only once a day
The dissemination of the Intraday Indicative Value together with the Disclosed
Portfolio will allow investors to determine the value of the underlying portfolio of the
Fund on a daily basis and will provide a close estimate of that value throughout the
trading day
Investors will also be able to obtain the Fundrsquos Statement of Additional
Information (ldquoSAIrdquo) the Fundrsquos annual and semi-annual reports (together ldquoShareholder
Reportsrdquo) and its Form N-CSR and Form N-SAR filed twice a year The Fundrsquos SAI
and Shareholder Reports will be available free upon request from the Fund and those
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or
downloaded from the Commissionrsquos website at wwwsecgov Information regarding
Currently the NASDAQ OMX Global Index Data Service (ldquoGIDSrdquo) is the NASDAQ OMX global index data feed service offering real-time updates daily summary messages and access to widely followed indexes and Intraday Indicative Values for ETFs GIDS provides investment professionals with the daily information needed to track or trade NASDAQ OMX indexes listed ETFs or third-party partner indexes and ETFs
36
SR-NASDAQ-2015-011 Amendment No 2 Page 52 of 64
market price and trading volume of the Shares will be continually available on a real-time
basis throughout the day on brokersrsquo computer screens and other electronic services
Information regarding the previous dayrsquos closing price and trading volume information
for the Shares will be published daily in the financial section of newspapers Quotation
and last sale information for the Shares will be available via Nasdaq proprietary quote
and trade services as well as in accordance with the Unlisted Trading Privileges and the
Consolidated Tape Association (ldquoCTArdquo) plans for the Shares Quotation and last sale
information for the other ETFs in which the Fund will invest will be available via the
quote and trade services of their respective primary exchanges as well as in accordance
with the Unlisted Trading Privileges and the CTA plans as applicable Quotation and
last sale information for US exchange-traded options will be available via the Options
Price Reporting Authority Intraday executable price quotations on Floating Rate Debt
Instruments and other assets not traded on an exchange will be available from major
broker-dealer firms or market data vendors as well as from automated quotation systems
published or other public sources or online information services Additionally the Trade
Reporting and Compliance Engine (ldquoTRACErdquo) of the Financial Industry Regulatory
Authority (ldquoFINRArdquo) will be a source of price information for corporate bonds
privately-issued securities mortgage-backed securities and asset-backed securities to the
extent transactions in such securities are reported to TRACE37 For exchange-traded
Broker-dealers that are FINRA member firms have an obligation to report transactions in specified debt securities to TRACE to the extent required under applicable FINRA rules Generally such debt securities will have at issuance a maturity that exceeds one calendar year
37
SR-NASDAQ-2015-011 Amendment No 2 Page 53 of 64
assets intraday pricing information will be available directly from the applicable listing
exchange
Additional information regarding the Fund and the Shares including investment
strategies risks creation and redemption procedures fees Fund holdings disclosure
policies distributions and taxes will be included in the Registration Statement
Initial and Continued Listing
The Shares will be subject to Rule 5735 which sets forth the initial and continued
listing criteria applicable to Managed Fund Shares The Exchange represents that for
initial andor continued listing the Fund must be in compliance with Rule 10A-338 under
the Act A minimum of 100000 Shares will be outstanding at the commencement of
trading on the Exchange The Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the NAV and the
Disclosed Portfolio will be made available to all market participants at the same time
Trading Halts
With respect to trading halts the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading in the Shares of the Fund Nasdaq will
halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12) Trading may be
halted because of market conditions or for reasons that in the view of the Exchange
make trading in the Shares inadvisable These may include (1) the extent to which
trading is not occurring in the securities andor the other assets constituting the Disclosed
Portfolio of the Fund or (2) whether other unusual conditions or circumstances
See 17 CFR 24010A-3 38
SR-NASDAQ-2015-011 Amendment No 2 Page 54 of 64
detrimental to the maintenance of a fair and orderly market are present Trading in the
Shares also will be subject to Rule 5735(d)(2)(D) which sets forth circumstances under
which Shares of the Fund may be halted
Trading Rules
Nasdaq deems the Shares to be equity securities thus rendering trading in the
Shares subject to Nasdaqrsquos existing rules governing the trading of equity securities
Nasdaq will allow trading in the Shares from 400 am until 800 pm Eastern Time
The Exchange has appropriate rules to facilitate transactions in the Shares during all
trading sessions As provided in Nasdaq Rule 5735(b)(3) the minimum price variation
for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $001
Surveillance
The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws39 The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities laws
The surveillances referred to above generally focus on detecting securities trading
outside their normal patterns which could be indicative of manipulative or other violative
activity When such situations are detected surveillance analysis follows and
FINRA surveils trading on the Exchange pursuant to a regulatory services agreement The Exchange is responsible for FINRArsquos performance under this regulatory services agreement
39
SR-NASDAQ-2015-011 Amendment No 2 Page 55 of 64
investigations are opened where appropriate to review the behavior of all relevant
parties for all relevant trading violations
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 56 of 64
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
SR-NASDAQ-2015-011 Amendment No 2 Page 57 of 64
2 Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
SR-NASDAQ-2015-011 Amendment No 2 Page 58 of 64
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
SR-NASDAQ-2015-011 Amendment No 2 Page 59 of 64
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
SR-NASDAQ-2015-011 Amendment No 2 Page 60 of 64
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 61 of 64
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
SR-NASDAQ-2015-011 Amendment No 2 Page 62 of 64
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
B Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
C Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received From Members Participants or Others
Written comments were neither solicited nor received
III Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Within 45 days of the date of publication of this notice in the Federal Register or
within such longer period (i) as the Commission may designate up to 90 days of such date
if it finds such longer period to be appropriate and publishes its reasons for so finding or
(ii) as to which the Exchange consents the Commission shall (a) by order approve or
disapprove such proposed rule change or (b) institute proceedings to determine whether
the proposed rule change should be disapproved
SR-NASDAQ-2015-011 Amendment No 2 Page 63 of 64
IV Solicitation of Comments
Interested persons are invited to submit written data views and arguments
concerning the foregoing including whether the proposed rule change is consistent with
the Act Comments may be submitted by any of the following methods
Electronic comments
bull Use the Commissionrsquos Internet comment form
(httpwwwsecgovrulessroshtml) or
bull Send an e-mail to rule-commentssecgov Please include File Number
SR-NASDAQ-2015-011 on the subject line
Paper comments
bull Send paper comments in triplicate to Brent J Fields Secretary Securities and
Exchange Commission Station Place 100 F Street NE Washington DC
20549-9303
All submissions should refer to File Number SR-NASDAQ-2015-011 This file number
should be included on the subject line if e-mail is used To help the Commission process
and review your comments more efficiently please use only one method The
Commission will post all comments on the Commissionrsquos Internet website
httpwwwsecgovrulessroshtml
Copies of the submission all subsequent amendments all written statements with
respect to the proposed rule change that are filed with the Commission and all written
communications relating to the proposed rule change between the Commission and any
person other than those that may be withheld from the public in accordance with the
provisions of 5 USC 552 will be available for website viewing and printing in the
Commissionrsquos Public Reference Room 100 F Street NE Washington DC 20549 on
SR-NASDAQ-2015-011 Amendment No 2 Page 64 of 64
official business days between the hours of 1000 am and 300 pm Copies of the filing
also will be available for inspection and copying at the principal office of Nasdaq All
comments received will be posted without change the Commission does not edit
personal identifying information from submissions You should submit only information
that you wish to make available publicly
All submissions should refer to File Number SR-NASDAQ-2015-011 and should
be submitted on or before [insert date 21 days from publication in the Federal Register]
For the Commission by the Division of Trading and Markets pursuant to
delegated authority41
Kevin M OrsquoNeill Deputy Secretary
17 CFR 20030-3(a)(12) 41
SR-NASDAQ-2015-011 Amendment No 2 Page 23 of 64
Shares also will be subject to Rule 5735(d)(2)(D) which sets forth circumstances under
which Shares of the Fund may be halted
Trading Rules
Nasdaq deems the Shares to be equity securities thus rendering trading in the
Shares subject to Nasdaqrsquos existing rules governing the trading of equity securities
Nasdaq will allow trading in the Shares from 400 am until 800 pm Eastern Time
The Exchange has appropriate rules to facilitate transactions in the Shares during all
trading sessions As provided in Nasdaq Rule 5735(b)(3) the minimum price variation
for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $001
Surveillance
The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws39 The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities laws
The surveillances referred to above generally focus on detecting securities trading
outside their normal patterns which could be indicative of manipulative or other violative
activity When such situations are detected surveillance analysis follows and
investigations are opened where appropriate to review the behavior of all relevant
parties for all relevant trading violations
FINRA surveils trading on the Exchange pursuant to a regulatory services agreement The Exchange is responsible for FINRArsquos performance under this regulatory services agreement
39
SR-NASDAQ-2015-011 Amendment No 2 Page 24 of 64
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 25 of 64
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
b Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
SR-NASDAQ-2015-011 Amendment No 2 Page 26 of 64
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
SR-NASDAQ-2015-011 Amendment No 2 Page 27 of 64
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
SR-NASDAQ-2015-011 Amendment No 2 Page 28 of 64
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
SR-NASDAQ-2015-011 Amendment No 2 Page 29 of 64
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
SR-NASDAQ-2015-011 Amendment No 2 Page 30 of 64
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
SR-NASDAQ-2015-011 Amendment No 2 Page 31 of 64
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
4 Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
5 Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received from Members Participants or Others
Written comments were neither solicited nor received
6 Extension of Time Period for Commission Action
The Exchange does not consent at this time to an extension of any time period for
Commission action
7 Basis for Summary Effectiveness Pursuant to Section 19(b)(3) or for Accelerated Effectiveness Pursuant to Section 19(b)(2)
Not applicable
8 Proposed Rule Change Based on Rules of Another Self-Regulatory Organization or of the Commission
Not applicable
9 Security-Based Swap Submissions Filed Pursuant to Section 3C of the Act
Not applicable
SR-NASDAQ-2015-011 Amendment No 2 Page 32 of 64
10 Advance Notices Filed Pursuant to Section 806(e) of the Payment Clearing and Settlement Supervision Act
Not applicable
11 Exhibits
1 Completed notice of proposed rule change for publication in the Federal
Register
SR-NASDAQ-2015-011 Amendment No 2 Page 33 of 64
EXHIBIT 1
SECURITIES AND EXCHANGE COMMISSION (Release No 34shy File No SR-NASDAQ-2015-011)
April __ 2015
Self-Regulatory Organizations The NASDAQ Stock Market LLC Notice of Filing of Proposed Rule Change Relating to the Listing and Trading of the Shares of the First Trust Strategic Floating Rate ETF of First Trust Exchange-Traded Fund IV
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (ldquoActrdquo)1 and
Rule 19b-4 thereunder2 notice is hereby given that on February 12 2015 The NASDAQ
Stock Market LLC (ldquoNasdaqrdquo or the ldquoExchangerdquo) filed with the Securities and Exchange
Commission (ldquoCommissionrdquo) the proposed rule change as described in in Items I II and
III below which Items have been prepared by Nasdaq On April 6 2015 Nasdaq filed
Amendment No 1 which replaced the text of the original filing in its entirety On April
15 2015 Nasdaq filed Amendment No 2 which replaced the text of the original filing in
its entirety The Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons
I Self-Regulatory Organizationrsquos Statement of the Terms of Substance of the Proposed Rule Change
Nasdaq proposes to list and trade the shares of the First Trust Strategic Floating
Rate ETF (the ldquoFundrdquo) of the First Trust Strategic Floating Rate ETF (the ldquoFundrdquo) of
First Trust Exchange-Traded Fund IV (the ldquoTrustrdquo) under Nasdaq Rule 5735 (ldquoManaged
1 15 USC 78s(b)(1)
2 17 CFR 24019b-4
SR-NASDAQ-2015-011 Amendment No 2 Page 34 of 64
Fund Sharesrdquo)3 The shares of the Fund are collectively referred to herein as the
ldquoSharesrdquo
The text of the proposed rule change is available at
httpnasdaqcchwallstreetcom at Nasdaqrsquos principal office and at the Commissionrsquos
Public Reference Room
II Self-Regulatory Organizationrsquos Statement of the Purpose of and Statutory Basis for the Proposed Rule Change
In its filing with the Commission Nasdaq included statements concerning the
purpose of and basis for the proposed rule change The text of these statements may be
examined at the places specified in Item IV below Nasdaq has prepared summaries set
forth in Sections A B and C below of the most significant aspects of such statements
A Self-Regulatory Organizationrsquos Statement of the Purpose of and Statutory Basis for the Proposed Rule Change
1 Purpose
The Exchange proposes to list and trade the Shares of the Fund under Nasdaq
Rule 5735 which governs the listing and trading of Managed Fund Shares4 on the
3 The Commission approved Nasdaq Rule 5735 in Securities Exchange Act Release No 57962 (June 13 2008) 73 FR 35175 (June 20 2008) (SR-NASDAQ-2008shy039) There are already multiple actively-managed funds listed on the Exchange see eg Securities Exchange Act Release Nos 69464 (April 26 2013) 78 FR 25774 (May 2 2013) (SR-NASDAQ-2013-036) (order approving listing and trading of First Trust Senior Loan Fund) 68972 (February 22 2013) 78 FR 13721 (February 28 2013) (SR-NASDAQ-2012-147) (order approving listing and trading of First Trust High Yield LongShort ETF) 66489 (February 29 2012) 77 FR 13379 (March 6 2012) (SR-NASDAQ-2012-004) (order approving listing and trading of WisdomTree Emerging Markets Corporate Bond Fund) The Exchange believes the proposed rule change raises no significant issues not previously addressed in those prior Commission orders
4 A Managed Fund Share is a security that represents an interest in an investment company registered under the Investment Company Act of 1940 (15 USC 80ashy
SR-NASDAQ-2015-011 Amendment No 2 Page 35 of 64
Exchange The Fund will be an actively-managed exchange-traded fund (ldquoETFrdquo) The
Shares will be offered by the Trust which was established as a Massachusetts business
trust on September 15 20105 The Trust is registered with the Commission as an
investment company and has filed a registration statement on Form N-1A (ldquoRegistration
Statementrdquo) with the Commission6 The Fund will be a series of the Trust The Fund
intends to qualify each year as a regulated investment company (ldquoRICrdquo) under
Subchapter M of the Internal Revenue Code of 1986 as amended
First Trust Advisors LP will be the investment adviser (ldquoAdviserrdquo) to the Fund
First Trust Portfolios LP (the ldquoDistributorrdquo) will be the principal underwriter and
distributor of the Fundrsquos Shares The Bank of New York Mellon Corporation (ldquoBNYrdquo)
will act as the administrator accounting agent custodian and transfer agent to the Fund
1) (the ldquo1940 Actrdquo) organized as an open-end investment company or similar entity that invests in a portfolio of securities selected by its investment adviser consistent with its investment objectives and policies In contrast an open-end investment company that issues Index Fund Shares listed and traded on the Exchange under Nasdaq Rule 5705 seeks to provide investment results that correspond generally to the price and yield performance of a specific foreign or domestic stock index fixed income securities index or combination thereof
5 The Commission has issued an order upon which the Trust may rely granting certain exemptive relief under the 1940 Act See Investment Company Act Release No 30029 (April 10 2012) (File No 812-13795) (the ldquoExemptive Reliefrdquo) In addition the Commission has issued no-action relief upon which the Trust may rely pertaining to the Fundrsquos ability to invest in derivatives notwithstanding certain representations in the application for the Exemptive Relief See Commission No-Action Letter (December 6 2012)
6 See Post-Effective Amendment No 104 to Registration Statement on Form N-1A for the Trust dated January 29 2015 (File Nos 333-174332 and 811-22559) The descriptions of the Fund and the Shares contained herein are based in part on information in the Registration Statement
7
SR-NASDAQ-2015-011 Amendment No 2 Page 36 of 64
Paragraph (g) of Rule 5735 provides that if the investment adviser to the
investment company issuing Managed Fund Shares is affiliated with a broker-dealer
such investment adviser shall erect a ldquofire wallrdquo between the investment adviser and the
broker-dealer with respect to access to information concerning the composition andor
changes to such investment company portfolio7 In addition paragraph (g) further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio Rule 5735(g) is similar
to Nasdaq Rule 5705(b)(5)(A)(i) however paragraph (g) in connection with the
establishment of a ldquofire wallrdquo between the investment adviser and the broker-dealer
reflects the applicable open-end fundrsquos portfolio not an underlying benchmark index as
is the case with index-based funds The Adviser is not a broker-dealer although it is
affiliated with the Distributor a broker-dealer The Adviser has implemented a fire wall
An investment adviser to an open-end fund is required to be registered under the Investment Advisers Act of 1940 (the ldquoAdvisers Actrdquo) As a result the Adviser and its related personnel are subject to the provisions of Rule 204A-1 under the Advisers Act relating to codes of ethics This Rule requires investment advisers to adopt a code of ethics that reflects the fiduciary nature of the relationship to clients as well as compliance with other applicable securities laws Accordingly procedures designed to prevent the communication and misuse of non-public information by an investment adviser must be consistent with Rule 204A-1 under the Advisers Act In addition Rule 206(4)-7 under the Advisers Act makes it unlawful for an investment adviser to provide investment advice to clients unless such investment adviser has (i) adopted and implemented written policies and procedures reasonably designed to prevent violation by the investment adviser and its supervised persons of the Advisers Act and the Commission rules adopted thereunder (ii) implemented at a minimum an annual review regarding the adequacy of the policies and procedures established pursuant to subparagraph (i) above and the effectiveness of their implementation and (iii) designated an individual (who is a supervised person) responsible for administering the policies and procedures adopted under subparagraph (i) above
8
SR-NASDAQ-2015-011 Amendment No 2 Page 37 of 64
with respect to its broker-dealer affiliate regarding access to information concerning the
composition andor changes to the portfolio In addition personnel who make decisions
on the Fundrsquos portfolio composition will be subject to procedures designed to prevent the
use and dissemination of material non-public information regarding the Fundrsquos portfolio
In the event (a) the Adviser becomes or becomes newly affiliated with a broker-dealer
or (b) any new adviser or sub-adviser is a registered broker-dealer or becomes affiliated
with another broker-dealer it will implement a fire wall with respect to its relevant
personnel andor such broker-dealer affiliate as applicable regarding access to
information concerning the composition andor changes to the portfolio and will be
subject to procedures designed to prevent the use and dissemination of material
non-public information regarding such portfolio The Fund does not currently intend to
use a sub-adviser
First Trust Strategic Floating Rate ETF
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions8 at least 80 of its
The term ldquounder normal market conditionsrdquo as used herein includes but is not limited to the absence of adverse market economic political or other conditions including extreme volatility or trading halts in the fixed income markets or the financial markets generally operational issues causing dissemination of inaccurate market information or force majeure type events such as systems failure natural or man-made disaster act of God armed conflict act of terrorism riot or labor disruption or any similar intervening circumstance For temporary defensive purposes during the initial invest-up period and during periods of high cash inflows or outflows the Fund may depart from its principal investment strategies for example it may hold a higher than normal proportion of its assets in cash During such periods the Fund may not be able to achieve its investment objective The Fund may adopt a defensive strategy when the Adviser believes securities in which the Fund normally invests have elevated risks due to political or economic factors and in other extraordinary circumstances
SR-NASDAQ-2015-011 Amendment No 2 Page 38 of 64
net assets in a portfolio of the following types of floating-rate9 debt instruments issued by
US and non-US public- and private-sector entities floating-rate corporate10 and
government bonds and notes floating-rate agency securities 11 floating-rate instruments
of non-US issuers floating-rate privately-issued securities 12 floating-rate asset-backed
securities 13 floating-rate mortgage-backed securities14 floating-rate loans 15 and
9 For the avoidance of doubt the term ldquofloating-raterdquo shall also include similar terms such as ldquovariable-raterdquo and ldquoadjustable-raterdquo
10 The Adviser expects that under normal market conditions generally for a corporate bond to be considered as an eligible investment after taking into account such an investment at least 75 of the Fundrsquos net assets that are invested in floating-rate corporate bonds and as described below fixed-rate corporate bonds (in the aggregate) will be comprised of corporate bonds that have at the time of original issuance $100 million or more par amount outstanding
11 ldquoAgency securitiesrdquo for these purposes generally includes securities issued by the following entities Government National Mortgage Association (Ginnie Mae) Federal National Mortgage Association (Fannie Mae) Federal Home Loan Banks (FHLBanks) Federal Home Loan Mortgage Corporation (Freddie Mac) Farm Credit System (FCS) Farm Credit Banks (FCBanks) Student Loan Marketing Association (Sallie Mae) Resolution Funding Corporation (REFCORP) Financing Corporation (FICO) and the Farm Credit System (FCS) Financial Assistance Corporation (FAC) Agency securities can include but are not limited to mortgage-backed securities
12 ldquoPrivately-issued securitiesrdquo for these purposes generally includes Rule 144A securities other than mortgage-backed Rule 144A securities Under normal market conditions privately-issued securities will have at the time of original issuance $100 million or more principal amount outstanding to be considered eligible investments
13 Asset-backed securities are securities that are backed by a pool of assets The Fund currently intends to invest in asset-backed securities that are consumer asset-backed securities
14 Mortgage-backed securities which are securities that directly or indirectly represent a participation in or are secured by and payable from mortgage loans on real property will consist of (1) residential mortgage-backed securities (ldquoRMBSrdquo) (2) commercial mortgage-backed securities (ldquoCMBSrdquo) (3) stripped mortgage-backed securities (ldquoSMBSrdquo) which are mortgage-backed securities
SR-NASDAQ-2015-011 Amendment No 2 Page 39 of 64
investment companies16 (including investment companies advised by the Adviser) that
invest primarily in the foregoing types of debt instruments17 (collectively ldquoFloating Rate
Debt Instrumentsrdquo)
where mortgage payments are divided between paying the loanrsquos principal and paying the loanrsquos interest (4) collateralized mortgage obligations (ldquoCMOsrdquo) and real estate mortgage investment conduits (ldquoREMICsrdquo) which are mortgage-backed securities that are divided into multiple classes with each class being entitled to a different share of the principal and interest payments received from the pool of underlying assets
15 The floating-rate loans in which the Fund will invest will represent amounts borrowed by companies or other entities from banks and other lenders and a significant portion of such floating-rate loans may be rated below investment grade or unrated Floating-rate loans held by the Fund may be senior or subordinate obligations of the borrower and may or may not be secured by collateral First lien senior secured floating-rate loans are referred to herein as ldquosenior loansrdquo Floating-rate loans that are not senior loans (ie unsecured floating-rate loans and secured floating-rate loans that are not first lien floating-rate loans) are referred to herein as ldquojunior loansrdquo The Fund will generally invest in floating-rate loans that the Adviser deems to be liquid with readily available prices notwithstanding the foregoing the Fund may invest in floating-rate loans that are deemed illiquid so long as the Fund complies with the 15 limitation on investments of its net assets in illiquid assets described below under ldquoInvestment Restrictionsrdquo
16 The Fund currently anticipates investing only in registered open-end investment companies that are listed and traded in the US on registered exchanges (ie other ETFs) An ETF is an investment company registered under the 1940 Act that holds a portfolio of securities Many ETFs are designed to track the performance of a securities index including industry sector country and region indexes The Fund may invest in the securities of ETFs in excess of the limits imposed under the 1940 Act pursuant to exemptive orders obtained by other ETFs and their sponsors from the Commission In addition the Fund may invest in the securities of certain investment companies in excess of the limits imposed under the 1940 Act pursuant to an exemptive order obtained by the Trust and the Adviser from the Commission See Investment Company Act Release No 30377 (February 5 2013) (File No 812-13895) The ETFs in which the Fund may invest include Index Fund Shares (as described in Nasdaq Rule 5705) Portfolio Depository Receipts (as described in Nasdaq Rule 5705) and Managed Fund Shares (as described in Nasdaq Rule 5735) While the Fund may invest in inverse ETFs the Fund will not invest in leveraged or inverse leveraged (eg 2X or -3X) ETFs
SR-NASDAQ-2015-011 Amendment No 2 Page 40 of 64
At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade To be considered
ldquoinvestment graderdquo under normal market conditions rated Floating Rate Debt
Instruments will carry at the time of purchase a rating in the highest four rating
categories of at least one nationally recognized statistical ratings organization
(ldquoNRSROrdquo) (eg BBB- or higher by Standard amp Poorrsquos Ratings Services (ldquoSampPrdquo)
andor Fitch Ratings (ldquoFitchrdquo) or Baa3 or higher by Moodyrsquos Investors Service Inc
(ldquoMoodyrsquosrdquo)18 For unrated securities to be considered ldquoinvestment graderdquo under normal
market conditions such securities will be determined at the time of purchase to be of
comparable quality19 by the Adviser The Fund may invest up to 35 of its net assets in
securities that are at the time of investment rated below investment grade by each
NRSRO rating such securities (or securities that are unrated and determined by the
17 The liquidity of a security especially in the case of asset-backed and mortgage-backed securities will be a substantial factor in the Fundrsquos security selection process Consistent with the discussion below under ldquoInvestment Restrictionsrdquo the Fund will not purchase any Floating Rate Debt Instruments (including asset-backed securities and mortgage-backed securities) that in the Adviserrsquos opinion are illiquid if as a result more than 15 of the value of the Fundrsquos net assets will be invested in illiquid assets
18 For the avoidance of doubt if a security is rated by multiple NRSROs and receives different ratings the Fund will treat the security as being rated in the highest rating category received from an NRSRO
19 Comparable quality of unrated securities will be determined by the Adviser based on fundamental credit analysis of the unrated security and comparable NRSRO-rated securities On a best efforts basis the Adviser will attempt to make a rating determination based on publicly available data In making a ldquocomparable qualityrdquo determination the Adviser may consider for example whether the issuer of the security has issued other rated securities the nature and provisions of the relevant security whether the obligations under the relevant security are guaranteed by another entity and the rating of such guarantor (if any) relevant cash flows macroeconomic analysis andor sector or industry analysis
SR-NASDAQ-2015-011 Amendment No 2 Page 41 of 64
Adviser to be of comparable quality) commonly referred to as ldquohigh yieldrdquo or ldquojunkrdquo
bonds If subsequent to purchase by the Fund a security held by the Fund experiences a
decline in credit quality and falls below investment grade the Fund may continue to hold
the security and it will not cause the Fund to violate the 35 investment limitation
however the security will be taken into account for purposes of determining whether
purchases of additional securities will cause the Fund to violate such limitation
The Fund will limit its investments in asset-backed securities (excluding agency
mortgage-backed securities) and non-agency mortgage-backed securities (in the
aggregate) to 20 of its net assets20 In addition the Fund will limit its investments in
junior loans to 20 of its net assets
The Fund will hold debt securities (including in the aggregate Floating Rate
Debt Instruments and the fixed-rate debt securities described below) of at least 13
non-affiliated issuers
Other Investments
Under normal market conditions the Fund will invest primarily in the Floating
Rate Debt Instruments described above to meet its investment objective In addition the
Fund may invest up to 20 of its net assets in the following types of fixed-rate debt
securities corporate21 and government bonds and notes agency securities22 instruments
20 For the avoidance of doubt there is no limitation on the Fundrsquos investments in agency mortgage-backed securities
21 See footnote 10 above
22 See footnote 11 above
SR-NASDAQ-2015-011 Amendment No 2 Page 42 of 64
of non-US issuers in developed markets privately-issued securities 23 asset-backed
securities 24 mortgage-backed securities 25 municipal bonds money market securities26
and investment companies27 (including investment companies advised by the Adviser)
that invest primarily in the foregoing types of debt securities
Further to pursue its investment objective the Fund may invest up to 20 of the
value of its net assets in exchange-listed options on US Treasury futures contracts and
exchange-listed US Treasury futures contracts28 The use of these derivative
transactions may allow the Fund to obtain net long or short exposures to selected interest
rates These derivatives may also be used to hedge risks including interest rate risks and
credit risks associated with the Fundrsquos portfolio investments The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
23 See footnote 12 above
24 See footnote 13 above
25 See footnote 14 above
26 ldquoMoney market securitiesrdquo for these purposes generally includes short-term high-quality obligations issued or guaranteed by the US Treasury or the agencies or instrumentalities of the US government short-term high-quality securities issued or guaranteed by non-US governments agencies and instrumentalities repurchase agreements commercial paper (both asset-backed and non-assetshybacked) and deposits and other obligations of US and non-US banks and financial institutions
27 See footnote 16 above
28 At least 90 of the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be invested in instruments that trade in markets that are members of the Intermarket Surveillance Group (ldquoISGrdquo) (see footnote 40 below) or are parties to a comprehensive surveillance sharing agreement with the Exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 43 of 64
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index
Investment Restrictions
The Fund will not invest 25 or more of the value of its total assets in securities
of issuers in any one industry This restriction does not apply to (a) obligations issued or
guaranteed by the US government its agencies or instrumentalities or (b) securities of
other investment companies29
The Fund may hold up to an aggregate amount of 15 of its net assets in illiquid
assets (calculated at the time of investment) including Rule 144A securities deemed
illiquid by the Adviser30 The Fund will monitor its portfolio liquidity on an ongoing
basis to determine whether in light of current circumstances an adequate level of
liquidity is being maintained and will consider taking appropriate steps in order to
maintain adequate liquidity if through a change in values net assets or other
circumstances more than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid
assets include securities subject to contractual or other restrictions on resale and other
29 See Form N-1A Item 9 The Commission has taken the position that a fund is concentrated if it invests more than 25 of the value of its total assets in any one industry See eg Investment Company Act Release No 9011 (October 30 1975) 40 FR 54241 (November 21 1975)
30 In reaching liquidity decisions the Adviser may consider the following factors the frequency of trades and quotes for the security the number of dealers wishing to purchase or sell the security and the number of other potential purchasers dealer undertakings to make a market in the security and the nature of the security and the nature of the marketplace in which it trades (eg the time needed to dispose of the security the method of soliciting offers and the mechanics of transfer)
SR-NASDAQ-2015-011 Amendment No 2 Page 44 of 64
instruments that lack readily available markets as determined in accordance with
Commission staff guidance31
The Fund will not invest in non-US equity securities
Creation and Redemption of Shares
The Fund will issue and redeem Shares on a continuous basis at net asset value
(ldquoNAVrdquo)32 only in large blocks of Shares (ldquoCreation Unitsrdquo) in transactions with
authorized participants generally including broker-dealers and large institutional
investors (ldquoAuthorized Participantsrdquo) Creation Units generally will consist of 50000
Shares although this may change from time to time Creation Units however are not
expected to consist of less than 50000 Shares As described in the Registration
Statement and consistent with the Exemptive Relief the Fund will issue and redeem
Creation Units in exchange for an in-kind portfolio of instruments andor cash in lieu of
31 The Commission has stated that long-standing Commission guidelines have required open-end funds to hold no more than 15 of their net assets in illiquid securities and other illiquid assets See Investment Company Act Release No 28193 (March 11 2008) 73 FR 14618 (March 18 2008) footnote 34 See also Investment Company Act Release No 5847 (October 21 1969) 35 FR 19989 (December 31 1970) (Statement Regarding ldquoRestricted Securitiesrdquo) Investment Company Act Release No 18612 (March 12 1992) 57 FR 9828 (March 20 1992) (Revisions of Guidelines to Form N-1A) A fundrsquos portfolio security is illiquid if it cannot be disposed of in the ordinary course of business within seven days at approximately the value ascribed to it by the fund See Investment Company Act Release No 14983 (March 12 1986) 51 FR 9773 (March 21 1986) (adopting amendments to Rule 2a-7 under the 1940 Act) Investment Company Act Release No 17452 (April 23 1990) 55 FR 17933 (April 30 1990) (adopting Rule 144A under the Securities Act of 1933)
32 The NAV of the Fundrsquos Shares generally will be calculated once daily Monday through Friday as of the close of regular trading on the New York Stock Exchange generally 400 pm Eastern Time (the ldquoNAV Calculation Timerdquo) NAV per Share will be calculated by dividing the Fundrsquos net assets by the number of Fund Shares outstanding For more information regarding the valuation of Fund investments in calculating the Fundrsquos NAV see the Registration Statement
SR-NASDAQ-2015-011 Amendment No 2 Page 45 of 64
such instruments (the ldquoCreation Basketrdquo) In addition if there is a difference between the
NAV attributable to a Creation Unit and the market value of the Creation Basket
exchanged for the Creation Unit the party conveying instruments with the lower value
will pay to the other an amount in cash equal to the difference (referred to as the ldquoCash
Componentrdquo)
Creations and redemptions must be made by or through an Authorized Participant
that has executed an agreement that has been agreed to by the Distributor and BNY with
respect to creations and redemptions of Creation Units All standard orders to create
Creation Units must be received by the transfer agent no later than the closing time of the
regular trading session on the New York Stock Exchange (ordinarily 400 pm Eastern
Time) (the ldquoClosing Timerdquo) in each case on the date such order is placed in order for the
creation of Creation Units to be effected based on the NAV of Shares as next determined
on such date after receipt of the order in proper form Shares may be redeemed only in
Creation Units at their NAV next determined after receipt not later than the Closing Time
of a redemption request in proper form by the Fund through the transfer agent and only
on a business day
The Fundrsquos custodian through the National Securities Clearing Corporation will
make available on each business day prior to the opening of business of the Exchange
the list of the names and quantities of the instruments comprising the Creation Basket as
well as the estimated Cash Component (if any) for that day The published Creation
Basket will apply until a new Creation Basket is announced on the following business
day prior to commencement of trading in the Shares
SR-NASDAQ-2015-011 Amendment No 2 Page 46 of 64
Net Asset Value
The Fundrsquos NAV will be determined as of the close of trading (normally
400 pm Eastern Time) on each day the New York Stock Exchange is open for
business NAV will be calculated for the Fund by taking the market price of the Fundrsquos
total assets including interest or dividends accrued but not yet collected less all
liabilities and dividing such amount by the total number of Shares outstanding The
result rounded to the nearest cent will be the NAV per Share All valuations will be
subject to review by the Board of Trustees of the Trust (ldquoTrust Boardrdquo) or its delegate
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with valuation procedures (which may be revised from time to time) adopted by the Trust
Board (the ldquoValuation Proceduresrdquo) and in accordance with the 1940 Act A market
valuation generally means a valuation (i) obtained from an exchange an independent
pricing service (ldquoPricing Servicerdquo) or a major market maker (or dealer) or (ii) based on a
price quotation or other equivalent indication of value supplied by an exchange a Pricing
Service or a major market maker (or dealer) The information summarized below is
based on the Valuation Procedures as currently in effect however as noted above the
Valuation Procedures are amended from time to time and therefore such information is
subject to change
Certain securities including Floating Rate Debt Instruments in which the Fund
may invest will not be listed on any securities exchange or board of trade Such
securities will typically be bought and sold by institutional investors in individually
negotiated private transactions that function in many respects like an over-the-counter
SR-NASDAQ-2015-011 Amendment No 2 Page 47 of 64
secondary market although typically no formal market makers will exist Certain
securities particularly debt securities will have few or no trades or trade infrequently
and information regarding a specific security may not be widely available or may be
incomplete Accordingly determinations of the fair value of debt securities may be
based on infrequent and dated information Because there is less reliable objective data
available elements of judgment may play a greater role in valuation of debt securities
than for other types of securities Typically Floating Rate Debt Instruments and other
debt securities in which the Fund may invest (other than those described below) will be
valued using information provided by a Pricing Service Debt securities having a
remaining maturity of 60 days or less when purchased will be valued at cost adjusted for
amortization of premiums and accretion of discounts provided the Adviserrsquos pricing
committee (the ldquoPricing Committeerdquo) has determined that the use of amortized cost is an
appropriate reflection of fair value given market and issuer-specific conditions existing at
the time of the determination Overnight repurchase agreements will be valued at cost
and term repurchase agreements (ie those whose maturity exceeds seven days) will be
valued at the average of the bid quotations obtained daily from at least two recognized
dealers
Asset-backed and mortgage-backed securities will generally be valued by using a
Pricing Service If a Pricing Service does not cover a particular asset-backed or
mortgage-backed security or discontinues covering a particular asset-backed or
mortgage-backed security the security will be priced using broker quotes generally
provided by brokers that make or participate in markets in the security To derive values
Pricing Services and broker-dealers may use matrix pricing and valuation models as well
SR-NASDAQ-2015-011 Amendment No 2 Page 48 of 64
as recent market transactions for the same or similar assets As it deems appropriate the
Pricing Committee may determine that a Pricing Service price does not represent an
accurate value of an asset-backed or mortgage-backed security based on broker quotes it
receives a recent trade in the security by the Fund information from a portfolio manager
or other market information In the event that the Pricing Committee determines that the
Pricing Service price is unreliable or inaccurate based on such other information broker
quotes may be used Additionally if the Pricing Committee determines that the price of
an asset-backed or mortgage-backed security obtained from a Pricing Service and
available broker quotes is unreliable or inaccurate due to market conditions or other
reasons or if a Pricing Service price or broker quote is unavailable the security will be
valued using fair value pricing as described below
Equity securities listed on any exchange other than the Exchange will be valued at
the last sale price on the exchange on which they are principally traded on the business
day as of which such value is being determined Equity securities listed on the Exchange
will be valued at the official closing price on the business day as of which such value is
being determined If there has been no sale on such day or no official closing price in
the case of securities traded on the Exchange the securities will be valued using fair
value pricing as described below Equity securities traded on more than one securities
exchange will be valued at the last sale price or official closing price as applicable on
the business day as of which such value is being determined at the close of the exchange
representing the principal market for such securities
Exchange-traded options and futures contracts will be valued at the closing price
in the market where such contracts are principally traded
SR-NASDAQ-2015-011 Amendment No 2 Page 49 of 64
Certain securities including Floating Rate Debt Instruments in which the Fund
will invest will not be able to be priced by pre-established pricing methods Such
securities may be valued by the Trust Board or its delegate at fair value The use of fair
value pricing by the Fund will be governed by the Valuation Procedures and conducted in
accordance with the provisions of the 1940 Act Valuing the Fundrsquos securities using fair
value pricing will result in using prices for those securities that may differ from current
market valuations or official closing prices on the applicable exchange
Availability of Information
The Fundrsquos website (wwwftportfolioscom) which will be publicly available
prior to the public offering of Shares will include a form of the prospectus for the Fund
that may be downloaded The website will include the Sharesrsquo ticker CUSIP and
exchange information along with additional quantitative information updated on a daily
basis including for the Fund (1) daily trading volume the prior business dayrsquos reported
NAV and closing price mid-point of the bidask spread at the time of calculation of such
NAV (the ldquoBidAsk Pricerdquo)33 and a calculation of the premium and discount of the
BidAsk Price against the NAV and (2) data in chart format displaying the frequency
distribution of discounts and premiums of the daily BidAsk Price against the NAV
within appropriate ranges for each of the four previous calendar quarters On each
business day before commencement of trading in Shares in the Regular Market Session34
33 The BidAsk Price of the Fund will be determined using the mid-point of the highest bid and the lowest offer on the Exchange as of the time of calculation of the Fundrsquos NAV The records relating to BidAsk Prices will be retained by the Fund and its service providers
34 See Nasdaq Rule 4120(b)(4) (describing the three trading sessions on the Exchange (1) Pre-Market Session from 4 am to 930 am Eastern Time (2)
SR-NASDAQ-2015-011 Amendment No 2 Page 50 of 64
on the Exchange the Fund will disclose on its website the identities and quantities of the
portfolio of securities and other assets (the ldquoDisclosed Portfoliordquo as defined in Nasdaq
Rule 5735(c)(2)) held by the Fund that will form the basis for the Fundrsquos calculation of
NAV at the end of the business day 35 The Fundrsquos disclosure of derivative positions in
the Disclosed Portfolio will include information that market participants can use to value
these positions intraday On a daily basis the Fund will disclose on the Fundrsquos website
the following information regarding each portfolio holding as applicable to the type of
holding ticker symbol CUSIP number or other identifier if any a description of the
holding (including the type of holding) the identity of the security or other asset or
instrument underlying the holding if any for options the option strike price quantity
held (as measured by for example par value notional value or number of shares
contracts or units) maturity date if any coupon rate if any effective date if any market
value of the holding and percentage weighting of the holding in the Fundrsquos portfolio
The website information will be publicly available at no charge
In addition for the Fund an estimated value defined in Rule 5735(c)(3) as the
ldquoIntraday Indicative Valuerdquo that reflects an estimated intraday value of the Fundrsquos
Disclosed Portfolio will be disseminated Moreover the Intraday Indicative Value
Regular Market Session from 930 am to 4 pm or 415 pm Eastern Time and (3) Post-Market Session from 4 pm or 415 pm to 8 pm Eastern Time)
Under accounting procedures to be followed by the Fund trades made on the prior business day (ldquoTrdquo) will be booked and reflected in NAV on the current business day (ldquoT+1rdquo) Accordingly the Fund will be able to disclose at the beginning of the business day the portfolio that will form the basis for the NAV calculation at the end of the business day
35
SR-NASDAQ-2015-011 Amendment No 2 Page 51 of 64
available on the NASDAQ OMX Information LLC proprietary index data service36 will
be based upon the current value for the components of the Disclosed Portfolio and will be
updated and widely disseminated by one or more major market data vendors and broadly
displayed at least every 15 seconds during the Regular Market Session The Intraday
Indicative Value will be based on quotes and closing prices from the securitiesrsquo local
market and may not reflect events that occur subsequent to the local marketrsquos close
Premiums and discounts between the Intraday Indicative Value and the market price may
occur This should not be viewed as a ldquoreal timerdquo update of the NAV per Share of the
Fund which is calculated only once a day
The dissemination of the Intraday Indicative Value together with the Disclosed
Portfolio will allow investors to determine the value of the underlying portfolio of the
Fund on a daily basis and will provide a close estimate of that value throughout the
trading day
Investors will also be able to obtain the Fundrsquos Statement of Additional
Information (ldquoSAIrdquo) the Fundrsquos annual and semi-annual reports (together ldquoShareholder
Reportsrdquo) and its Form N-CSR and Form N-SAR filed twice a year The Fundrsquos SAI
and Shareholder Reports will be available free upon request from the Fund and those
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or
downloaded from the Commissionrsquos website at wwwsecgov Information regarding
Currently the NASDAQ OMX Global Index Data Service (ldquoGIDSrdquo) is the NASDAQ OMX global index data feed service offering real-time updates daily summary messages and access to widely followed indexes and Intraday Indicative Values for ETFs GIDS provides investment professionals with the daily information needed to track or trade NASDAQ OMX indexes listed ETFs or third-party partner indexes and ETFs
36
SR-NASDAQ-2015-011 Amendment No 2 Page 52 of 64
market price and trading volume of the Shares will be continually available on a real-time
basis throughout the day on brokersrsquo computer screens and other electronic services
Information regarding the previous dayrsquos closing price and trading volume information
for the Shares will be published daily in the financial section of newspapers Quotation
and last sale information for the Shares will be available via Nasdaq proprietary quote
and trade services as well as in accordance with the Unlisted Trading Privileges and the
Consolidated Tape Association (ldquoCTArdquo) plans for the Shares Quotation and last sale
information for the other ETFs in which the Fund will invest will be available via the
quote and trade services of their respective primary exchanges as well as in accordance
with the Unlisted Trading Privileges and the CTA plans as applicable Quotation and
last sale information for US exchange-traded options will be available via the Options
Price Reporting Authority Intraday executable price quotations on Floating Rate Debt
Instruments and other assets not traded on an exchange will be available from major
broker-dealer firms or market data vendors as well as from automated quotation systems
published or other public sources or online information services Additionally the Trade
Reporting and Compliance Engine (ldquoTRACErdquo) of the Financial Industry Regulatory
Authority (ldquoFINRArdquo) will be a source of price information for corporate bonds
privately-issued securities mortgage-backed securities and asset-backed securities to the
extent transactions in such securities are reported to TRACE37 For exchange-traded
Broker-dealers that are FINRA member firms have an obligation to report transactions in specified debt securities to TRACE to the extent required under applicable FINRA rules Generally such debt securities will have at issuance a maturity that exceeds one calendar year
37
SR-NASDAQ-2015-011 Amendment No 2 Page 53 of 64
assets intraday pricing information will be available directly from the applicable listing
exchange
Additional information regarding the Fund and the Shares including investment
strategies risks creation and redemption procedures fees Fund holdings disclosure
policies distributions and taxes will be included in the Registration Statement
Initial and Continued Listing
The Shares will be subject to Rule 5735 which sets forth the initial and continued
listing criteria applicable to Managed Fund Shares The Exchange represents that for
initial andor continued listing the Fund must be in compliance with Rule 10A-338 under
the Act A minimum of 100000 Shares will be outstanding at the commencement of
trading on the Exchange The Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the NAV and the
Disclosed Portfolio will be made available to all market participants at the same time
Trading Halts
With respect to trading halts the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading in the Shares of the Fund Nasdaq will
halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12) Trading may be
halted because of market conditions or for reasons that in the view of the Exchange
make trading in the Shares inadvisable These may include (1) the extent to which
trading is not occurring in the securities andor the other assets constituting the Disclosed
Portfolio of the Fund or (2) whether other unusual conditions or circumstances
See 17 CFR 24010A-3 38
SR-NASDAQ-2015-011 Amendment No 2 Page 54 of 64
detrimental to the maintenance of a fair and orderly market are present Trading in the
Shares also will be subject to Rule 5735(d)(2)(D) which sets forth circumstances under
which Shares of the Fund may be halted
Trading Rules
Nasdaq deems the Shares to be equity securities thus rendering trading in the
Shares subject to Nasdaqrsquos existing rules governing the trading of equity securities
Nasdaq will allow trading in the Shares from 400 am until 800 pm Eastern Time
The Exchange has appropriate rules to facilitate transactions in the Shares during all
trading sessions As provided in Nasdaq Rule 5735(b)(3) the minimum price variation
for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $001
Surveillance
The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws39 The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities laws
The surveillances referred to above generally focus on detecting securities trading
outside their normal patterns which could be indicative of manipulative or other violative
activity When such situations are detected surveillance analysis follows and
FINRA surveils trading on the Exchange pursuant to a regulatory services agreement The Exchange is responsible for FINRArsquos performance under this regulatory services agreement
39
SR-NASDAQ-2015-011 Amendment No 2 Page 55 of 64
investigations are opened where appropriate to review the behavior of all relevant
parties for all relevant trading violations
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 56 of 64
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
SR-NASDAQ-2015-011 Amendment No 2 Page 57 of 64
2 Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
SR-NASDAQ-2015-011 Amendment No 2 Page 58 of 64
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
SR-NASDAQ-2015-011 Amendment No 2 Page 59 of 64
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
SR-NASDAQ-2015-011 Amendment No 2 Page 60 of 64
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 61 of 64
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
SR-NASDAQ-2015-011 Amendment No 2 Page 62 of 64
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
B Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
C Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received From Members Participants or Others
Written comments were neither solicited nor received
III Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Within 45 days of the date of publication of this notice in the Federal Register or
within such longer period (i) as the Commission may designate up to 90 days of such date
if it finds such longer period to be appropriate and publishes its reasons for so finding or
(ii) as to which the Exchange consents the Commission shall (a) by order approve or
disapprove such proposed rule change or (b) institute proceedings to determine whether
the proposed rule change should be disapproved
SR-NASDAQ-2015-011 Amendment No 2 Page 63 of 64
IV Solicitation of Comments
Interested persons are invited to submit written data views and arguments
concerning the foregoing including whether the proposed rule change is consistent with
the Act Comments may be submitted by any of the following methods
Electronic comments
bull Use the Commissionrsquos Internet comment form
(httpwwwsecgovrulessroshtml) or
bull Send an e-mail to rule-commentssecgov Please include File Number
SR-NASDAQ-2015-011 on the subject line
Paper comments
bull Send paper comments in triplicate to Brent J Fields Secretary Securities and
Exchange Commission Station Place 100 F Street NE Washington DC
20549-9303
All submissions should refer to File Number SR-NASDAQ-2015-011 This file number
should be included on the subject line if e-mail is used To help the Commission process
and review your comments more efficiently please use only one method The
Commission will post all comments on the Commissionrsquos Internet website
httpwwwsecgovrulessroshtml
Copies of the submission all subsequent amendments all written statements with
respect to the proposed rule change that are filed with the Commission and all written
communications relating to the proposed rule change between the Commission and any
person other than those that may be withheld from the public in accordance with the
provisions of 5 USC 552 will be available for website viewing and printing in the
Commissionrsquos Public Reference Room 100 F Street NE Washington DC 20549 on
SR-NASDAQ-2015-011 Amendment No 2 Page 64 of 64
official business days between the hours of 1000 am and 300 pm Copies of the filing
also will be available for inspection and copying at the principal office of Nasdaq All
comments received will be posted without change the Commission does not edit
personal identifying information from submissions You should submit only information
that you wish to make available publicly
All submissions should refer to File Number SR-NASDAQ-2015-011 and should
be submitted on or before [insert date 21 days from publication in the Federal Register]
For the Commission by the Division of Trading and Markets pursuant to
delegated authority41
Kevin M OrsquoNeill Deputy Secretary
17 CFR 20030-3(a)(12) 41
SR-NASDAQ-2015-011 Amendment No 2 Page 24 of 64
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 25 of 64
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
b Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
SR-NASDAQ-2015-011 Amendment No 2 Page 26 of 64
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
SR-NASDAQ-2015-011 Amendment No 2 Page 27 of 64
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
SR-NASDAQ-2015-011 Amendment No 2 Page 28 of 64
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
SR-NASDAQ-2015-011 Amendment No 2 Page 29 of 64
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
SR-NASDAQ-2015-011 Amendment No 2 Page 30 of 64
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
SR-NASDAQ-2015-011 Amendment No 2 Page 31 of 64
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
4 Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
5 Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received from Members Participants or Others
Written comments were neither solicited nor received
6 Extension of Time Period for Commission Action
The Exchange does not consent at this time to an extension of any time period for
Commission action
7 Basis for Summary Effectiveness Pursuant to Section 19(b)(3) or for Accelerated Effectiveness Pursuant to Section 19(b)(2)
Not applicable
8 Proposed Rule Change Based on Rules of Another Self-Regulatory Organization or of the Commission
Not applicable
9 Security-Based Swap Submissions Filed Pursuant to Section 3C of the Act
Not applicable
SR-NASDAQ-2015-011 Amendment No 2 Page 32 of 64
10 Advance Notices Filed Pursuant to Section 806(e) of the Payment Clearing and Settlement Supervision Act
Not applicable
11 Exhibits
1 Completed notice of proposed rule change for publication in the Federal
Register
SR-NASDAQ-2015-011 Amendment No 2 Page 33 of 64
EXHIBIT 1
SECURITIES AND EXCHANGE COMMISSION (Release No 34shy File No SR-NASDAQ-2015-011)
April __ 2015
Self-Regulatory Organizations The NASDAQ Stock Market LLC Notice of Filing of Proposed Rule Change Relating to the Listing and Trading of the Shares of the First Trust Strategic Floating Rate ETF of First Trust Exchange-Traded Fund IV
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (ldquoActrdquo)1 and
Rule 19b-4 thereunder2 notice is hereby given that on February 12 2015 The NASDAQ
Stock Market LLC (ldquoNasdaqrdquo or the ldquoExchangerdquo) filed with the Securities and Exchange
Commission (ldquoCommissionrdquo) the proposed rule change as described in in Items I II and
III below which Items have been prepared by Nasdaq On April 6 2015 Nasdaq filed
Amendment No 1 which replaced the text of the original filing in its entirety On April
15 2015 Nasdaq filed Amendment No 2 which replaced the text of the original filing in
its entirety The Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons
I Self-Regulatory Organizationrsquos Statement of the Terms of Substance of the Proposed Rule Change
Nasdaq proposes to list and trade the shares of the First Trust Strategic Floating
Rate ETF (the ldquoFundrdquo) of the First Trust Strategic Floating Rate ETF (the ldquoFundrdquo) of
First Trust Exchange-Traded Fund IV (the ldquoTrustrdquo) under Nasdaq Rule 5735 (ldquoManaged
1 15 USC 78s(b)(1)
2 17 CFR 24019b-4
SR-NASDAQ-2015-011 Amendment No 2 Page 34 of 64
Fund Sharesrdquo)3 The shares of the Fund are collectively referred to herein as the
ldquoSharesrdquo
The text of the proposed rule change is available at
httpnasdaqcchwallstreetcom at Nasdaqrsquos principal office and at the Commissionrsquos
Public Reference Room
II Self-Regulatory Organizationrsquos Statement of the Purpose of and Statutory Basis for the Proposed Rule Change
In its filing with the Commission Nasdaq included statements concerning the
purpose of and basis for the proposed rule change The text of these statements may be
examined at the places specified in Item IV below Nasdaq has prepared summaries set
forth in Sections A B and C below of the most significant aspects of such statements
A Self-Regulatory Organizationrsquos Statement of the Purpose of and Statutory Basis for the Proposed Rule Change
1 Purpose
The Exchange proposes to list and trade the Shares of the Fund under Nasdaq
Rule 5735 which governs the listing and trading of Managed Fund Shares4 on the
3 The Commission approved Nasdaq Rule 5735 in Securities Exchange Act Release No 57962 (June 13 2008) 73 FR 35175 (June 20 2008) (SR-NASDAQ-2008shy039) There are already multiple actively-managed funds listed on the Exchange see eg Securities Exchange Act Release Nos 69464 (April 26 2013) 78 FR 25774 (May 2 2013) (SR-NASDAQ-2013-036) (order approving listing and trading of First Trust Senior Loan Fund) 68972 (February 22 2013) 78 FR 13721 (February 28 2013) (SR-NASDAQ-2012-147) (order approving listing and trading of First Trust High Yield LongShort ETF) 66489 (February 29 2012) 77 FR 13379 (March 6 2012) (SR-NASDAQ-2012-004) (order approving listing and trading of WisdomTree Emerging Markets Corporate Bond Fund) The Exchange believes the proposed rule change raises no significant issues not previously addressed in those prior Commission orders
4 A Managed Fund Share is a security that represents an interest in an investment company registered under the Investment Company Act of 1940 (15 USC 80ashy
SR-NASDAQ-2015-011 Amendment No 2 Page 35 of 64
Exchange The Fund will be an actively-managed exchange-traded fund (ldquoETFrdquo) The
Shares will be offered by the Trust which was established as a Massachusetts business
trust on September 15 20105 The Trust is registered with the Commission as an
investment company and has filed a registration statement on Form N-1A (ldquoRegistration
Statementrdquo) with the Commission6 The Fund will be a series of the Trust The Fund
intends to qualify each year as a regulated investment company (ldquoRICrdquo) under
Subchapter M of the Internal Revenue Code of 1986 as amended
First Trust Advisors LP will be the investment adviser (ldquoAdviserrdquo) to the Fund
First Trust Portfolios LP (the ldquoDistributorrdquo) will be the principal underwriter and
distributor of the Fundrsquos Shares The Bank of New York Mellon Corporation (ldquoBNYrdquo)
will act as the administrator accounting agent custodian and transfer agent to the Fund
1) (the ldquo1940 Actrdquo) organized as an open-end investment company or similar entity that invests in a portfolio of securities selected by its investment adviser consistent with its investment objectives and policies In contrast an open-end investment company that issues Index Fund Shares listed and traded on the Exchange under Nasdaq Rule 5705 seeks to provide investment results that correspond generally to the price and yield performance of a specific foreign or domestic stock index fixed income securities index or combination thereof
5 The Commission has issued an order upon which the Trust may rely granting certain exemptive relief under the 1940 Act See Investment Company Act Release No 30029 (April 10 2012) (File No 812-13795) (the ldquoExemptive Reliefrdquo) In addition the Commission has issued no-action relief upon which the Trust may rely pertaining to the Fundrsquos ability to invest in derivatives notwithstanding certain representations in the application for the Exemptive Relief See Commission No-Action Letter (December 6 2012)
6 See Post-Effective Amendment No 104 to Registration Statement on Form N-1A for the Trust dated January 29 2015 (File Nos 333-174332 and 811-22559) The descriptions of the Fund and the Shares contained herein are based in part on information in the Registration Statement
7
SR-NASDAQ-2015-011 Amendment No 2 Page 36 of 64
Paragraph (g) of Rule 5735 provides that if the investment adviser to the
investment company issuing Managed Fund Shares is affiliated with a broker-dealer
such investment adviser shall erect a ldquofire wallrdquo between the investment adviser and the
broker-dealer with respect to access to information concerning the composition andor
changes to such investment company portfolio7 In addition paragraph (g) further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio Rule 5735(g) is similar
to Nasdaq Rule 5705(b)(5)(A)(i) however paragraph (g) in connection with the
establishment of a ldquofire wallrdquo between the investment adviser and the broker-dealer
reflects the applicable open-end fundrsquos portfolio not an underlying benchmark index as
is the case with index-based funds The Adviser is not a broker-dealer although it is
affiliated with the Distributor a broker-dealer The Adviser has implemented a fire wall
An investment adviser to an open-end fund is required to be registered under the Investment Advisers Act of 1940 (the ldquoAdvisers Actrdquo) As a result the Adviser and its related personnel are subject to the provisions of Rule 204A-1 under the Advisers Act relating to codes of ethics This Rule requires investment advisers to adopt a code of ethics that reflects the fiduciary nature of the relationship to clients as well as compliance with other applicable securities laws Accordingly procedures designed to prevent the communication and misuse of non-public information by an investment adviser must be consistent with Rule 204A-1 under the Advisers Act In addition Rule 206(4)-7 under the Advisers Act makes it unlawful for an investment adviser to provide investment advice to clients unless such investment adviser has (i) adopted and implemented written policies and procedures reasonably designed to prevent violation by the investment adviser and its supervised persons of the Advisers Act and the Commission rules adopted thereunder (ii) implemented at a minimum an annual review regarding the adequacy of the policies and procedures established pursuant to subparagraph (i) above and the effectiveness of their implementation and (iii) designated an individual (who is a supervised person) responsible for administering the policies and procedures adopted under subparagraph (i) above
8
SR-NASDAQ-2015-011 Amendment No 2 Page 37 of 64
with respect to its broker-dealer affiliate regarding access to information concerning the
composition andor changes to the portfolio In addition personnel who make decisions
on the Fundrsquos portfolio composition will be subject to procedures designed to prevent the
use and dissemination of material non-public information regarding the Fundrsquos portfolio
In the event (a) the Adviser becomes or becomes newly affiliated with a broker-dealer
or (b) any new adviser or sub-adviser is a registered broker-dealer or becomes affiliated
with another broker-dealer it will implement a fire wall with respect to its relevant
personnel andor such broker-dealer affiliate as applicable regarding access to
information concerning the composition andor changes to the portfolio and will be
subject to procedures designed to prevent the use and dissemination of material
non-public information regarding such portfolio The Fund does not currently intend to
use a sub-adviser
First Trust Strategic Floating Rate ETF
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions8 at least 80 of its
The term ldquounder normal market conditionsrdquo as used herein includes but is not limited to the absence of adverse market economic political or other conditions including extreme volatility or trading halts in the fixed income markets or the financial markets generally operational issues causing dissemination of inaccurate market information or force majeure type events such as systems failure natural or man-made disaster act of God armed conflict act of terrorism riot or labor disruption or any similar intervening circumstance For temporary defensive purposes during the initial invest-up period and during periods of high cash inflows or outflows the Fund may depart from its principal investment strategies for example it may hold a higher than normal proportion of its assets in cash During such periods the Fund may not be able to achieve its investment objective The Fund may adopt a defensive strategy when the Adviser believes securities in which the Fund normally invests have elevated risks due to political or economic factors and in other extraordinary circumstances
SR-NASDAQ-2015-011 Amendment No 2 Page 38 of 64
net assets in a portfolio of the following types of floating-rate9 debt instruments issued by
US and non-US public- and private-sector entities floating-rate corporate10 and
government bonds and notes floating-rate agency securities 11 floating-rate instruments
of non-US issuers floating-rate privately-issued securities 12 floating-rate asset-backed
securities 13 floating-rate mortgage-backed securities14 floating-rate loans 15 and
9 For the avoidance of doubt the term ldquofloating-raterdquo shall also include similar terms such as ldquovariable-raterdquo and ldquoadjustable-raterdquo
10 The Adviser expects that under normal market conditions generally for a corporate bond to be considered as an eligible investment after taking into account such an investment at least 75 of the Fundrsquos net assets that are invested in floating-rate corporate bonds and as described below fixed-rate corporate bonds (in the aggregate) will be comprised of corporate bonds that have at the time of original issuance $100 million or more par amount outstanding
11 ldquoAgency securitiesrdquo for these purposes generally includes securities issued by the following entities Government National Mortgage Association (Ginnie Mae) Federal National Mortgage Association (Fannie Mae) Federal Home Loan Banks (FHLBanks) Federal Home Loan Mortgage Corporation (Freddie Mac) Farm Credit System (FCS) Farm Credit Banks (FCBanks) Student Loan Marketing Association (Sallie Mae) Resolution Funding Corporation (REFCORP) Financing Corporation (FICO) and the Farm Credit System (FCS) Financial Assistance Corporation (FAC) Agency securities can include but are not limited to mortgage-backed securities
12 ldquoPrivately-issued securitiesrdquo for these purposes generally includes Rule 144A securities other than mortgage-backed Rule 144A securities Under normal market conditions privately-issued securities will have at the time of original issuance $100 million or more principal amount outstanding to be considered eligible investments
13 Asset-backed securities are securities that are backed by a pool of assets The Fund currently intends to invest in asset-backed securities that are consumer asset-backed securities
14 Mortgage-backed securities which are securities that directly or indirectly represent a participation in or are secured by and payable from mortgage loans on real property will consist of (1) residential mortgage-backed securities (ldquoRMBSrdquo) (2) commercial mortgage-backed securities (ldquoCMBSrdquo) (3) stripped mortgage-backed securities (ldquoSMBSrdquo) which are mortgage-backed securities
SR-NASDAQ-2015-011 Amendment No 2 Page 39 of 64
investment companies16 (including investment companies advised by the Adviser) that
invest primarily in the foregoing types of debt instruments17 (collectively ldquoFloating Rate
Debt Instrumentsrdquo)
where mortgage payments are divided between paying the loanrsquos principal and paying the loanrsquos interest (4) collateralized mortgage obligations (ldquoCMOsrdquo) and real estate mortgage investment conduits (ldquoREMICsrdquo) which are mortgage-backed securities that are divided into multiple classes with each class being entitled to a different share of the principal and interest payments received from the pool of underlying assets
15 The floating-rate loans in which the Fund will invest will represent amounts borrowed by companies or other entities from banks and other lenders and a significant portion of such floating-rate loans may be rated below investment grade or unrated Floating-rate loans held by the Fund may be senior or subordinate obligations of the borrower and may or may not be secured by collateral First lien senior secured floating-rate loans are referred to herein as ldquosenior loansrdquo Floating-rate loans that are not senior loans (ie unsecured floating-rate loans and secured floating-rate loans that are not first lien floating-rate loans) are referred to herein as ldquojunior loansrdquo The Fund will generally invest in floating-rate loans that the Adviser deems to be liquid with readily available prices notwithstanding the foregoing the Fund may invest in floating-rate loans that are deemed illiquid so long as the Fund complies with the 15 limitation on investments of its net assets in illiquid assets described below under ldquoInvestment Restrictionsrdquo
16 The Fund currently anticipates investing only in registered open-end investment companies that are listed and traded in the US on registered exchanges (ie other ETFs) An ETF is an investment company registered under the 1940 Act that holds a portfolio of securities Many ETFs are designed to track the performance of a securities index including industry sector country and region indexes The Fund may invest in the securities of ETFs in excess of the limits imposed under the 1940 Act pursuant to exemptive orders obtained by other ETFs and their sponsors from the Commission In addition the Fund may invest in the securities of certain investment companies in excess of the limits imposed under the 1940 Act pursuant to an exemptive order obtained by the Trust and the Adviser from the Commission See Investment Company Act Release No 30377 (February 5 2013) (File No 812-13895) The ETFs in which the Fund may invest include Index Fund Shares (as described in Nasdaq Rule 5705) Portfolio Depository Receipts (as described in Nasdaq Rule 5705) and Managed Fund Shares (as described in Nasdaq Rule 5735) While the Fund may invest in inverse ETFs the Fund will not invest in leveraged or inverse leveraged (eg 2X or -3X) ETFs
SR-NASDAQ-2015-011 Amendment No 2 Page 40 of 64
At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade To be considered
ldquoinvestment graderdquo under normal market conditions rated Floating Rate Debt
Instruments will carry at the time of purchase a rating in the highest four rating
categories of at least one nationally recognized statistical ratings organization
(ldquoNRSROrdquo) (eg BBB- or higher by Standard amp Poorrsquos Ratings Services (ldquoSampPrdquo)
andor Fitch Ratings (ldquoFitchrdquo) or Baa3 or higher by Moodyrsquos Investors Service Inc
(ldquoMoodyrsquosrdquo)18 For unrated securities to be considered ldquoinvestment graderdquo under normal
market conditions such securities will be determined at the time of purchase to be of
comparable quality19 by the Adviser The Fund may invest up to 35 of its net assets in
securities that are at the time of investment rated below investment grade by each
NRSRO rating such securities (or securities that are unrated and determined by the
17 The liquidity of a security especially in the case of asset-backed and mortgage-backed securities will be a substantial factor in the Fundrsquos security selection process Consistent with the discussion below under ldquoInvestment Restrictionsrdquo the Fund will not purchase any Floating Rate Debt Instruments (including asset-backed securities and mortgage-backed securities) that in the Adviserrsquos opinion are illiquid if as a result more than 15 of the value of the Fundrsquos net assets will be invested in illiquid assets
18 For the avoidance of doubt if a security is rated by multiple NRSROs and receives different ratings the Fund will treat the security as being rated in the highest rating category received from an NRSRO
19 Comparable quality of unrated securities will be determined by the Adviser based on fundamental credit analysis of the unrated security and comparable NRSRO-rated securities On a best efforts basis the Adviser will attempt to make a rating determination based on publicly available data In making a ldquocomparable qualityrdquo determination the Adviser may consider for example whether the issuer of the security has issued other rated securities the nature and provisions of the relevant security whether the obligations under the relevant security are guaranteed by another entity and the rating of such guarantor (if any) relevant cash flows macroeconomic analysis andor sector or industry analysis
SR-NASDAQ-2015-011 Amendment No 2 Page 41 of 64
Adviser to be of comparable quality) commonly referred to as ldquohigh yieldrdquo or ldquojunkrdquo
bonds If subsequent to purchase by the Fund a security held by the Fund experiences a
decline in credit quality and falls below investment grade the Fund may continue to hold
the security and it will not cause the Fund to violate the 35 investment limitation
however the security will be taken into account for purposes of determining whether
purchases of additional securities will cause the Fund to violate such limitation
The Fund will limit its investments in asset-backed securities (excluding agency
mortgage-backed securities) and non-agency mortgage-backed securities (in the
aggregate) to 20 of its net assets20 In addition the Fund will limit its investments in
junior loans to 20 of its net assets
The Fund will hold debt securities (including in the aggregate Floating Rate
Debt Instruments and the fixed-rate debt securities described below) of at least 13
non-affiliated issuers
Other Investments
Under normal market conditions the Fund will invest primarily in the Floating
Rate Debt Instruments described above to meet its investment objective In addition the
Fund may invest up to 20 of its net assets in the following types of fixed-rate debt
securities corporate21 and government bonds and notes agency securities22 instruments
20 For the avoidance of doubt there is no limitation on the Fundrsquos investments in agency mortgage-backed securities
21 See footnote 10 above
22 See footnote 11 above
SR-NASDAQ-2015-011 Amendment No 2 Page 42 of 64
of non-US issuers in developed markets privately-issued securities 23 asset-backed
securities 24 mortgage-backed securities 25 municipal bonds money market securities26
and investment companies27 (including investment companies advised by the Adviser)
that invest primarily in the foregoing types of debt securities
Further to pursue its investment objective the Fund may invest up to 20 of the
value of its net assets in exchange-listed options on US Treasury futures contracts and
exchange-listed US Treasury futures contracts28 The use of these derivative
transactions may allow the Fund to obtain net long or short exposures to selected interest
rates These derivatives may also be used to hedge risks including interest rate risks and
credit risks associated with the Fundrsquos portfolio investments The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
23 See footnote 12 above
24 See footnote 13 above
25 See footnote 14 above
26 ldquoMoney market securitiesrdquo for these purposes generally includes short-term high-quality obligations issued or guaranteed by the US Treasury or the agencies or instrumentalities of the US government short-term high-quality securities issued or guaranteed by non-US governments agencies and instrumentalities repurchase agreements commercial paper (both asset-backed and non-assetshybacked) and deposits and other obligations of US and non-US banks and financial institutions
27 See footnote 16 above
28 At least 90 of the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be invested in instruments that trade in markets that are members of the Intermarket Surveillance Group (ldquoISGrdquo) (see footnote 40 below) or are parties to a comprehensive surveillance sharing agreement with the Exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 43 of 64
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index
Investment Restrictions
The Fund will not invest 25 or more of the value of its total assets in securities
of issuers in any one industry This restriction does not apply to (a) obligations issued or
guaranteed by the US government its agencies or instrumentalities or (b) securities of
other investment companies29
The Fund may hold up to an aggregate amount of 15 of its net assets in illiquid
assets (calculated at the time of investment) including Rule 144A securities deemed
illiquid by the Adviser30 The Fund will monitor its portfolio liquidity on an ongoing
basis to determine whether in light of current circumstances an adequate level of
liquidity is being maintained and will consider taking appropriate steps in order to
maintain adequate liquidity if through a change in values net assets or other
circumstances more than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid
assets include securities subject to contractual or other restrictions on resale and other
29 See Form N-1A Item 9 The Commission has taken the position that a fund is concentrated if it invests more than 25 of the value of its total assets in any one industry See eg Investment Company Act Release No 9011 (October 30 1975) 40 FR 54241 (November 21 1975)
30 In reaching liquidity decisions the Adviser may consider the following factors the frequency of trades and quotes for the security the number of dealers wishing to purchase or sell the security and the number of other potential purchasers dealer undertakings to make a market in the security and the nature of the security and the nature of the marketplace in which it trades (eg the time needed to dispose of the security the method of soliciting offers and the mechanics of transfer)
SR-NASDAQ-2015-011 Amendment No 2 Page 44 of 64
instruments that lack readily available markets as determined in accordance with
Commission staff guidance31
The Fund will not invest in non-US equity securities
Creation and Redemption of Shares
The Fund will issue and redeem Shares on a continuous basis at net asset value
(ldquoNAVrdquo)32 only in large blocks of Shares (ldquoCreation Unitsrdquo) in transactions with
authorized participants generally including broker-dealers and large institutional
investors (ldquoAuthorized Participantsrdquo) Creation Units generally will consist of 50000
Shares although this may change from time to time Creation Units however are not
expected to consist of less than 50000 Shares As described in the Registration
Statement and consistent with the Exemptive Relief the Fund will issue and redeem
Creation Units in exchange for an in-kind portfolio of instruments andor cash in lieu of
31 The Commission has stated that long-standing Commission guidelines have required open-end funds to hold no more than 15 of their net assets in illiquid securities and other illiquid assets See Investment Company Act Release No 28193 (March 11 2008) 73 FR 14618 (March 18 2008) footnote 34 See also Investment Company Act Release No 5847 (October 21 1969) 35 FR 19989 (December 31 1970) (Statement Regarding ldquoRestricted Securitiesrdquo) Investment Company Act Release No 18612 (March 12 1992) 57 FR 9828 (March 20 1992) (Revisions of Guidelines to Form N-1A) A fundrsquos portfolio security is illiquid if it cannot be disposed of in the ordinary course of business within seven days at approximately the value ascribed to it by the fund See Investment Company Act Release No 14983 (March 12 1986) 51 FR 9773 (March 21 1986) (adopting amendments to Rule 2a-7 under the 1940 Act) Investment Company Act Release No 17452 (April 23 1990) 55 FR 17933 (April 30 1990) (adopting Rule 144A under the Securities Act of 1933)
32 The NAV of the Fundrsquos Shares generally will be calculated once daily Monday through Friday as of the close of regular trading on the New York Stock Exchange generally 400 pm Eastern Time (the ldquoNAV Calculation Timerdquo) NAV per Share will be calculated by dividing the Fundrsquos net assets by the number of Fund Shares outstanding For more information regarding the valuation of Fund investments in calculating the Fundrsquos NAV see the Registration Statement
SR-NASDAQ-2015-011 Amendment No 2 Page 45 of 64
such instruments (the ldquoCreation Basketrdquo) In addition if there is a difference between the
NAV attributable to a Creation Unit and the market value of the Creation Basket
exchanged for the Creation Unit the party conveying instruments with the lower value
will pay to the other an amount in cash equal to the difference (referred to as the ldquoCash
Componentrdquo)
Creations and redemptions must be made by or through an Authorized Participant
that has executed an agreement that has been agreed to by the Distributor and BNY with
respect to creations and redemptions of Creation Units All standard orders to create
Creation Units must be received by the transfer agent no later than the closing time of the
regular trading session on the New York Stock Exchange (ordinarily 400 pm Eastern
Time) (the ldquoClosing Timerdquo) in each case on the date such order is placed in order for the
creation of Creation Units to be effected based on the NAV of Shares as next determined
on such date after receipt of the order in proper form Shares may be redeemed only in
Creation Units at their NAV next determined after receipt not later than the Closing Time
of a redemption request in proper form by the Fund through the transfer agent and only
on a business day
The Fundrsquos custodian through the National Securities Clearing Corporation will
make available on each business day prior to the opening of business of the Exchange
the list of the names and quantities of the instruments comprising the Creation Basket as
well as the estimated Cash Component (if any) for that day The published Creation
Basket will apply until a new Creation Basket is announced on the following business
day prior to commencement of trading in the Shares
SR-NASDAQ-2015-011 Amendment No 2 Page 46 of 64
Net Asset Value
The Fundrsquos NAV will be determined as of the close of trading (normally
400 pm Eastern Time) on each day the New York Stock Exchange is open for
business NAV will be calculated for the Fund by taking the market price of the Fundrsquos
total assets including interest or dividends accrued but not yet collected less all
liabilities and dividing such amount by the total number of Shares outstanding The
result rounded to the nearest cent will be the NAV per Share All valuations will be
subject to review by the Board of Trustees of the Trust (ldquoTrust Boardrdquo) or its delegate
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with valuation procedures (which may be revised from time to time) adopted by the Trust
Board (the ldquoValuation Proceduresrdquo) and in accordance with the 1940 Act A market
valuation generally means a valuation (i) obtained from an exchange an independent
pricing service (ldquoPricing Servicerdquo) or a major market maker (or dealer) or (ii) based on a
price quotation or other equivalent indication of value supplied by an exchange a Pricing
Service or a major market maker (or dealer) The information summarized below is
based on the Valuation Procedures as currently in effect however as noted above the
Valuation Procedures are amended from time to time and therefore such information is
subject to change
Certain securities including Floating Rate Debt Instruments in which the Fund
may invest will not be listed on any securities exchange or board of trade Such
securities will typically be bought and sold by institutional investors in individually
negotiated private transactions that function in many respects like an over-the-counter
SR-NASDAQ-2015-011 Amendment No 2 Page 47 of 64
secondary market although typically no formal market makers will exist Certain
securities particularly debt securities will have few or no trades or trade infrequently
and information regarding a specific security may not be widely available or may be
incomplete Accordingly determinations of the fair value of debt securities may be
based on infrequent and dated information Because there is less reliable objective data
available elements of judgment may play a greater role in valuation of debt securities
than for other types of securities Typically Floating Rate Debt Instruments and other
debt securities in which the Fund may invest (other than those described below) will be
valued using information provided by a Pricing Service Debt securities having a
remaining maturity of 60 days or less when purchased will be valued at cost adjusted for
amortization of premiums and accretion of discounts provided the Adviserrsquos pricing
committee (the ldquoPricing Committeerdquo) has determined that the use of amortized cost is an
appropriate reflection of fair value given market and issuer-specific conditions existing at
the time of the determination Overnight repurchase agreements will be valued at cost
and term repurchase agreements (ie those whose maturity exceeds seven days) will be
valued at the average of the bid quotations obtained daily from at least two recognized
dealers
Asset-backed and mortgage-backed securities will generally be valued by using a
Pricing Service If a Pricing Service does not cover a particular asset-backed or
mortgage-backed security or discontinues covering a particular asset-backed or
mortgage-backed security the security will be priced using broker quotes generally
provided by brokers that make or participate in markets in the security To derive values
Pricing Services and broker-dealers may use matrix pricing and valuation models as well
SR-NASDAQ-2015-011 Amendment No 2 Page 48 of 64
as recent market transactions for the same or similar assets As it deems appropriate the
Pricing Committee may determine that a Pricing Service price does not represent an
accurate value of an asset-backed or mortgage-backed security based on broker quotes it
receives a recent trade in the security by the Fund information from a portfolio manager
or other market information In the event that the Pricing Committee determines that the
Pricing Service price is unreliable or inaccurate based on such other information broker
quotes may be used Additionally if the Pricing Committee determines that the price of
an asset-backed or mortgage-backed security obtained from a Pricing Service and
available broker quotes is unreliable or inaccurate due to market conditions or other
reasons or if a Pricing Service price or broker quote is unavailable the security will be
valued using fair value pricing as described below
Equity securities listed on any exchange other than the Exchange will be valued at
the last sale price on the exchange on which they are principally traded on the business
day as of which such value is being determined Equity securities listed on the Exchange
will be valued at the official closing price on the business day as of which such value is
being determined If there has been no sale on such day or no official closing price in
the case of securities traded on the Exchange the securities will be valued using fair
value pricing as described below Equity securities traded on more than one securities
exchange will be valued at the last sale price or official closing price as applicable on
the business day as of which such value is being determined at the close of the exchange
representing the principal market for such securities
Exchange-traded options and futures contracts will be valued at the closing price
in the market where such contracts are principally traded
SR-NASDAQ-2015-011 Amendment No 2 Page 49 of 64
Certain securities including Floating Rate Debt Instruments in which the Fund
will invest will not be able to be priced by pre-established pricing methods Such
securities may be valued by the Trust Board or its delegate at fair value The use of fair
value pricing by the Fund will be governed by the Valuation Procedures and conducted in
accordance with the provisions of the 1940 Act Valuing the Fundrsquos securities using fair
value pricing will result in using prices for those securities that may differ from current
market valuations or official closing prices on the applicable exchange
Availability of Information
The Fundrsquos website (wwwftportfolioscom) which will be publicly available
prior to the public offering of Shares will include a form of the prospectus for the Fund
that may be downloaded The website will include the Sharesrsquo ticker CUSIP and
exchange information along with additional quantitative information updated on a daily
basis including for the Fund (1) daily trading volume the prior business dayrsquos reported
NAV and closing price mid-point of the bidask spread at the time of calculation of such
NAV (the ldquoBidAsk Pricerdquo)33 and a calculation of the premium and discount of the
BidAsk Price against the NAV and (2) data in chart format displaying the frequency
distribution of discounts and premiums of the daily BidAsk Price against the NAV
within appropriate ranges for each of the four previous calendar quarters On each
business day before commencement of trading in Shares in the Regular Market Session34
33 The BidAsk Price of the Fund will be determined using the mid-point of the highest bid and the lowest offer on the Exchange as of the time of calculation of the Fundrsquos NAV The records relating to BidAsk Prices will be retained by the Fund and its service providers
34 See Nasdaq Rule 4120(b)(4) (describing the three trading sessions on the Exchange (1) Pre-Market Session from 4 am to 930 am Eastern Time (2)
SR-NASDAQ-2015-011 Amendment No 2 Page 50 of 64
on the Exchange the Fund will disclose on its website the identities and quantities of the
portfolio of securities and other assets (the ldquoDisclosed Portfoliordquo as defined in Nasdaq
Rule 5735(c)(2)) held by the Fund that will form the basis for the Fundrsquos calculation of
NAV at the end of the business day 35 The Fundrsquos disclosure of derivative positions in
the Disclosed Portfolio will include information that market participants can use to value
these positions intraday On a daily basis the Fund will disclose on the Fundrsquos website
the following information regarding each portfolio holding as applicable to the type of
holding ticker symbol CUSIP number or other identifier if any a description of the
holding (including the type of holding) the identity of the security or other asset or
instrument underlying the holding if any for options the option strike price quantity
held (as measured by for example par value notional value or number of shares
contracts or units) maturity date if any coupon rate if any effective date if any market
value of the holding and percentage weighting of the holding in the Fundrsquos portfolio
The website information will be publicly available at no charge
In addition for the Fund an estimated value defined in Rule 5735(c)(3) as the
ldquoIntraday Indicative Valuerdquo that reflects an estimated intraday value of the Fundrsquos
Disclosed Portfolio will be disseminated Moreover the Intraday Indicative Value
Regular Market Session from 930 am to 4 pm or 415 pm Eastern Time and (3) Post-Market Session from 4 pm or 415 pm to 8 pm Eastern Time)
Under accounting procedures to be followed by the Fund trades made on the prior business day (ldquoTrdquo) will be booked and reflected in NAV on the current business day (ldquoT+1rdquo) Accordingly the Fund will be able to disclose at the beginning of the business day the portfolio that will form the basis for the NAV calculation at the end of the business day
35
SR-NASDAQ-2015-011 Amendment No 2 Page 51 of 64
available on the NASDAQ OMX Information LLC proprietary index data service36 will
be based upon the current value for the components of the Disclosed Portfolio and will be
updated and widely disseminated by one or more major market data vendors and broadly
displayed at least every 15 seconds during the Regular Market Session The Intraday
Indicative Value will be based on quotes and closing prices from the securitiesrsquo local
market and may not reflect events that occur subsequent to the local marketrsquos close
Premiums and discounts between the Intraday Indicative Value and the market price may
occur This should not be viewed as a ldquoreal timerdquo update of the NAV per Share of the
Fund which is calculated only once a day
The dissemination of the Intraday Indicative Value together with the Disclosed
Portfolio will allow investors to determine the value of the underlying portfolio of the
Fund on a daily basis and will provide a close estimate of that value throughout the
trading day
Investors will also be able to obtain the Fundrsquos Statement of Additional
Information (ldquoSAIrdquo) the Fundrsquos annual and semi-annual reports (together ldquoShareholder
Reportsrdquo) and its Form N-CSR and Form N-SAR filed twice a year The Fundrsquos SAI
and Shareholder Reports will be available free upon request from the Fund and those
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or
downloaded from the Commissionrsquos website at wwwsecgov Information regarding
Currently the NASDAQ OMX Global Index Data Service (ldquoGIDSrdquo) is the NASDAQ OMX global index data feed service offering real-time updates daily summary messages and access to widely followed indexes and Intraday Indicative Values for ETFs GIDS provides investment professionals with the daily information needed to track or trade NASDAQ OMX indexes listed ETFs or third-party partner indexes and ETFs
36
SR-NASDAQ-2015-011 Amendment No 2 Page 52 of 64
market price and trading volume of the Shares will be continually available on a real-time
basis throughout the day on brokersrsquo computer screens and other electronic services
Information regarding the previous dayrsquos closing price and trading volume information
for the Shares will be published daily in the financial section of newspapers Quotation
and last sale information for the Shares will be available via Nasdaq proprietary quote
and trade services as well as in accordance with the Unlisted Trading Privileges and the
Consolidated Tape Association (ldquoCTArdquo) plans for the Shares Quotation and last sale
information for the other ETFs in which the Fund will invest will be available via the
quote and trade services of their respective primary exchanges as well as in accordance
with the Unlisted Trading Privileges and the CTA plans as applicable Quotation and
last sale information for US exchange-traded options will be available via the Options
Price Reporting Authority Intraday executable price quotations on Floating Rate Debt
Instruments and other assets not traded on an exchange will be available from major
broker-dealer firms or market data vendors as well as from automated quotation systems
published or other public sources or online information services Additionally the Trade
Reporting and Compliance Engine (ldquoTRACErdquo) of the Financial Industry Regulatory
Authority (ldquoFINRArdquo) will be a source of price information for corporate bonds
privately-issued securities mortgage-backed securities and asset-backed securities to the
extent transactions in such securities are reported to TRACE37 For exchange-traded
Broker-dealers that are FINRA member firms have an obligation to report transactions in specified debt securities to TRACE to the extent required under applicable FINRA rules Generally such debt securities will have at issuance a maturity that exceeds one calendar year
37
SR-NASDAQ-2015-011 Amendment No 2 Page 53 of 64
assets intraday pricing information will be available directly from the applicable listing
exchange
Additional information regarding the Fund and the Shares including investment
strategies risks creation and redemption procedures fees Fund holdings disclosure
policies distributions and taxes will be included in the Registration Statement
Initial and Continued Listing
The Shares will be subject to Rule 5735 which sets forth the initial and continued
listing criteria applicable to Managed Fund Shares The Exchange represents that for
initial andor continued listing the Fund must be in compliance with Rule 10A-338 under
the Act A minimum of 100000 Shares will be outstanding at the commencement of
trading on the Exchange The Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the NAV and the
Disclosed Portfolio will be made available to all market participants at the same time
Trading Halts
With respect to trading halts the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading in the Shares of the Fund Nasdaq will
halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12) Trading may be
halted because of market conditions or for reasons that in the view of the Exchange
make trading in the Shares inadvisable These may include (1) the extent to which
trading is not occurring in the securities andor the other assets constituting the Disclosed
Portfolio of the Fund or (2) whether other unusual conditions or circumstances
See 17 CFR 24010A-3 38
SR-NASDAQ-2015-011 Amendment No 2 Page 54 of 64
detrimental to the maintenance of a fair and orderly market are present Trading in the
Shares also will be subject to Rule 5735(d)(2)(D) which sets forth circumstances under
which Shares of the Fund may be halted
Trading Rules
Nasdaq deems the Shares to be equity securities thus rendering trading in the
Shares subject to Nasdaqrsquos existing rules governing the trading of equity securities
Nasdaq will allow trading in the Shares from 400 am until 800 pm Eastern Time
The Exchange has appropriate rules to facilitate transactions in the Shares during all
trading sessions As provided in Nasdaq Rule 5735(b)(3) the minimum price variation
for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $001
Surveillance
The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws39 The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities laws
The surveillances referred to above generally focus on detecting securities trading
outside their normal patterns which could be indicative of manipulative or other violative
activity When such situations are detected surveillance analysis follows and
FINRA surveils trading on the Exchange pursuant to a regulatory services agreement The Exchange is responsible for FINRArsquos performance under this regulatory services agreement
39
SR-NASDAQ-2015-011 Amendment No 2 Page 55 of 64
investigations are opened where appropriate to review the behavior of all relevant
parties for all relevant trading violations
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 56 of 64
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
SR-NASDAQ-2015-011 Amendment No 2 Page 57 of 64
2 Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
SR-NASDAQ-2015-011 Amendment No 2 Page 58 of 64
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
SR-NASDAQ-2015-011 Amendment No 2 Page 59 of 64
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
SR-NASDAQ-2015-011 Amendment No 2 Page 60 of 64
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 61 of 64
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
SR-NASDAQ-2015-011 Amendment No 2 Page 62 of 64
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
B Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
C Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received From Members Participants or Others
Written comments were neither solicited nor received
III Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Within 45 days of the date of publication of this notice in the Federal Register or
within such longer period (i) as the Commission may designate up to 90 days of such date
if it finds such longer period to be appropriate and publishes its reasons for so finding or
(ii) as to which the Exchange consents the Commission shall (a) by order approve or
disapprove such proposed rule change or (b) institute proceedings to determine whether
the proposed rule change should be disapproved
SR-NASDAQ-2015-011 Amendment No 2 Page 63 of 64
IV Solicitation of Comments
Interested persons are invited to submit written data views and arguments
concerning the foregoing including whether the proposed rule change is consistent with
the Act Comments may be submitted by any of the following methods
Electronic comments
bull Use the Commissionrsquos Internet comment form
(httpwwwsecgovrulessroshtml) or
bull Send an e-mail to rule-commentssecgov Please include File Number
SR-NASDAQ-2015-011 on the subject line
Paper comments
bull Send paper comments in triplicate to Brent J Fields Secretary Securities and
Exchange Commission Station Place 100 F Street NE Washington DC
20549-9303
All submissions should refer to File Number SR-NASDAQ-2015-011 This file number
should be included on the subject line if e-mail is used To help the Commission process
and review your comments more efficiently please use only one method The
Commission will post all comments on the Commissionrsquos Internet website
httpwwwsecgovrulessroshtml
Copies of the submission all subsequent amendments all written statements with
respect to the proposed rule change that are filed with the Commission and all written
communications relating to the proposed rule change between the Commission and any
person other than those that may be withheld from the public in accordance with the
provisions of 5 USC 552 will be available for website viewing and printing in the
Commissionrsquos Public Reference Room 100 F Street NE Washington DC 20549 on
SR-NASDAQ-2015-011 Amendment No 2 Page 64 of 64
official business days between the hours of 1000 am and 300 pm Copies of the filing
also will be available for inspection and copying at the principal office of Nasdaq All
comments received will be posted without change the Commission does not edit
personal identifying information from submissions You should submit only information
that you wish to make available publicly
All submissions should refer to File Number SR-NASDAQ-2015-011 and should
be submitted on or before [insert date 21 days from publication in the Federal Register]
For the Commission by the Division of Trading and Markets pursuant to
delegated authority41
Kevin M OrsquoNeill Deputy Secretary
17 CFR 20030-3(a)(12) 41
SR-NASDAQ-2015-011 Amendment No 2 Page 25 of 64
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
b Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
SR-NASDAQ-2015-011 Amendment No 2 Page 26 of 64
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
SR-NASDAQ-2015-011 Amendment No 2 Page 27 of 64
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
SR-NASDAQ-2015-011 Amendment No 2 Page 28 of 64
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
SR-NASDAQ-2015-011 Amendment No 2 Page 29 of 64
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
SR-NASDAQ-2015-011 Amendment No 2 Page 30 of 64
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
SR-NASDAQ-2015-011 Amendment No 2 Page 31 of 64
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
4 Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
5 Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received from Members Participants or Others
Written comments were neither solicited nor received
6 Extension of Time Period for Commission Action
The Exchange does not consent at this time to an extension of any time period for
Commission action
7 Basis for Summary Effectiveness Pursuant to Section 19(b)(3) or for Accelerated Effectiveness Pursuant to Section 19(b)(2)
Not applicable
8 Proposed Rule Change Based on Rules of Another Self-Regulatory Organization or of the Commission
Not applicable
9 Security-Based Swap Submissions Filed Pursuant to Section 3C of the Act
Not applicable
SR-NASDAQ-2015-011 Amendment No 2 Page 32 of 64
10 Advance Notices Filed Pursuant to Section 806(e) of the Payment Clearing and Settlement Supervision Act
Not applicable
11 Exhibits
1 Completed notice of proposed rule change for publication in the Federal
Register
SR-NASDAQ-2015-011 Amendment No 2 Page 33 of 64
EXHIBIT 1
SECURITIES AND EXCHANGE COMMISSION (Release No 34shy File No SR-NASDAQ-2015-011)
April __ 2015
Self-Regulatory Organizations The NASDAQ Stock Market LLC Notice of Filing of Proposed Rule Change Relating to the Listing and Trading of the Shares of the First Trust Strategic Floating Rate ETF of First Trust Exchange-Traded Fund IV
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (ldquoActrdquo)1 and
Rule 19b-4 thereunder2 notice is hereby given that on February 12 2015 The NASDAQ
Stock Market LLC (ldquoNasdaqrdquo or the ldquoExchangerdquo) filed with the Securities and Exchange
Commission (ldquoCommissionrdquo) the proposed rule change as described in in Items I II and
III below which Items have been prepared by Nasdaq On April 6 2015 Nasdaq filed
Amendment No 1 which replaced the text of the original filing in its entirety On April
15 2015 Nasdaq filed Amendment No 2 which replaced the text of the original filing in
its entirety The Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons
I Self-Regulatory Organizationrsquos Statement of the Terms of Substance of the Proposed Rule Change
Nasdaq proposes to list and trade the shares of the First Trust Strategic Floating
Rate ETF (the ldquoFundrdquo) of the First Trust Strategic Floating Rate ETF (the ldquoFundrdquo) of
First Trust Exchange-Traded Fund IV (the ldquoTrustrdquo) under Nasdaq Rule 5735 (ldquoManaged
1 15 USC 78s(b)(1)
2 17 CFR 24019b-4
SR-NASDAQ-2015-011 Amendment No 2 Page 34 of 64
Fund Sharesrdquo)3 The shares of the Fund are collectively referred to herein as the
ldquoSharesrdquo
The text of the proposed rule change is available at
httpnasdaqcchwallstreetcom at Nasdaqrsquos principal office and at the Commissionrsquos
Public Reference Room
II Self-Regulatory Organizationrsquos Statement of the Purpose of and Statutory Basis for the Proposed Rule Change
In its filing with the Commission Nasdaq included statements concerning the
purpose of and basis for the proposed rule change The text of these statements may be
examined at the places specified in Item IV below Nasdaq has prepared summaries set
forth in Sections A B and C below of the most significant aspects of such statements
A Self-Regulatory Organizationrsquos Statement of the Purpose of and Statutory Basis for the Proposed Rule Change
1 Purpose
The Exchange proposes to list and trade the Shares of the Fund under Nasdaq
Rule 5735 which governs the listing and trading of Managed Fund Shares4 on the
3 The Commission approved Nasdaq Rule 5735 in Securities Exchange Act Release No 57962 (June 13 2008) 73 FR 35175 (June 20 2008) (SR-NASDAQ-2008shy039) There are already multiple actively-managed funds listed on the Exchange see eg Securities Exchange Act Release Nos 69464 (April 26 2013) 78 FR 25774 (May 2 2013) (SR-NASDAQ-2013-036) (order approving listing and trading of First Trust Senior Loan Fund) 68972 (February 22 2013) 78 FR 13721 (February 28 2013) (SR-NASDAQ-2012-147) (order approving listing and trading of First Trust High Yield LongShort ETF) 66489 (February 29 2012) 77 FR 13379 (March 6 2012) (SR-NASDAQ-2012-004) (order approving listing and trading of WisdomTree Emerging Markets Corporate Bond Fund) The Exchange believes the proposed rule change raises no significant issues not previously addressed in those prior Commission orders
4 A Managed Fund Share is a security that represents an interest in an investment company registered under the Investment Company Act of 1940 (15 USC 80ashy
SR-NASDAQ-2015-011 Amendment No 2 Page 35 of 64
Exchange The Fund will be an actively-managed exchange-traded fund (ldquoETFrdquo) The
Shares will be offered by the Trust which was established as a Massachusetts business
trust on September 15 20105 The Trust is registered with the Commission as an
investment company and has filed a registration statement on Form N-1A (ldquoRegistration
Statementrdquo) with the Commission6 The Fund will be a series of the Trust The Fund
intends to qualify each year as a regulated investment company (ldquoRICrdquo) under
Subchapter M of the Internal Revenue Code of 1986 as amended
First Trust Advisors LP will be the investment adviser (ldquoAdviserrdquo) to the Fund
First Trust Portfolios LP (the ldquoDistributorrdquo) will be the principal underwriter and
distributor of the Fundrsquos Shares The Bank of New York Mellon Corporation (ldquoBNYrdquo)
will act as the administrator accounting agent custodian and transfer agent to the Fund
1) (the ldquo1940 Actrdquo) organized as an open-end investment company or similar entity that invests in a portfolio of securities selected by its investment adviser consistent with its investment objectives and policies In contrast an open-end investment company that issues Index Fund Shares listed and traded on the Exchange under Nasdaq Rule 5705 seeks to provide investment results that correspond generally to the price and yield performance of a specific foreign or domestic stock index fixed income securities index or combination thereof
5 The Commission has issued an order upon which the Trust may rely granting certain exemptive relief under the 1940 Act See Investment Company Act Release No 30029 (April 10 2012) (File No 812-13795) (the ldquoExemptive Reliefrdquo) In addition the Commission has issued no-action relief upon which the Trust may rely pertaining to the Fundrsquos ability to invest in derivatives notwithstanding certain representations in the application for the Exemptive Relief See Commission No-Action Letter (December 6 2012)
6 See Post-Effective Amendment No 104 to Registration Statement on Form N-1A for the Trust dated January 29 2015 (File Nos 333-174332 and 811-22559) The descriptions of the Fund and the Shares contained herein are based in part on information in the Registration Statement
7
SR-NASDAQ-2015-011 Amendment No 2 Page 36 of 64
Paragraph (g) of Rule 5735 provides that if the investment adviser to the
investment company issuing Managed Fund Shares is affiliated with a broker-dealer
such investment adviser shall erect a ldquofire wallrdquo between the investment adviser and the
broker-dealer with respect to access to information concerning the composition andor
changes to such investment company portfolio7 In addition paragraph (g) further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio Rule 5735(g) is similar
to Nasdaq Rule 5705(b)(5)(A)(i) however paragraph (g) in connection with the
establishment of a ldquofire wallrdquo between the investment adviser and the broker-dealer
reflects the applicable open-end fundrsquos portfolio not an underlying benchmark index as
is the case with index-based funds The Adviser is not a broker-dealer although it is
affiliated with the Distributor a broker-dealer The Adviser has implemented a fire wall
An investment adviser to an open-end fund is required to be registered under the Investment Advisers Act of 1940 (the ldquoAdvisers Actrdquo) As a result the Adviser and its related personnel are subject to the provisions of Rule 204A-1 under the Advisers Act relating to codes of ethics This Rule requires investment advisers to adopt a code of ethics that reflects the fiduciary nature of the relationship to clients as well as compliance with other applicable securities laws Accordingly procedures designed to prevent the communication and misuse of non-public information by an investment adviser must be consistent with Rule 204A-1 under the Advisers Act In addition Rule 206(4)-7 under the Advisers Act makes it unlawful for an investment adviser to provide investment advice to clients unless such investment adviser has (i) adopted and implemented written policies and procedures reasonably designed to prevent violation by the investment adviser and its supervised persons of the Advisers Act and the Commission rules adopted thereunder (ii) implemented at a minimum an annual review regarding the adequacy of the policies and procedures established pursuant to subparagraph (i) above and the effectiveness of their implementation and (iii) designated an individual (who is a supervised person) responsible for administering the policies and procedures adopted under subparagraph (i) above
8
SR-NASDAQ-2015-011 Amendment No 2 Page 37 of 64
with respect to its broker-dealer affiliate regarding access to information concerning the
composition andor changes to the portfolio In addition personnel who make decisions
on the Fundrsquos portfolio composition will be subject to procedures designed to prevent the
use and dissemination of material non-public information regarding the Fundrsquos portfolio
In the event (a) the Adviser becomes or becomes newly affiliated with a broker-dealer
or (b) any new adviser or sub-adviser is a registered broker-dealer or becomes affiliated
with another broker-dealer it will implement a fire wall with respect to its relevant
personnel andor such broker-dealer affiliate as applicable regarding access to
information concerning the composition andor changes to the portfolio and will be
subject to procedures designed to prevent the use and dissemination of material
non-public information regarding such portfolio The Fund does not currently intend to
use a sub-adviser
First Trust Strategic Floating Rate ETF
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions8 at least 80 of its
The term ldquounder normal market conditionsrdquo as used herein includes but is not limited to the absence of adverse market economic political or other conditions including extreme volatility or trading halts in the fixed income markets or the financial markets generally operational issues causing dissemination of inaccurate market information or force majeure type events such as systems failure natural or man-made disaster act of God armed conflict act of terrorism riot or labor disruption or any similar intervening circumstance For temporary defensive purposes during the initial invest-up period and during periods of high cash inflows or outflows the Fund may depart from its principal investment strategies for example it may hold a higher than normal proportion of its assets in cash During such periods the Fund may not be able to achieve its investment objective The Fund may adopt a defensive strategy when the Adviser believes securities in which the Fund normally invests have elevated risks due to political or economic factors and in other extraordinary circumstances
SR-NASDAQ-2015-011 Amendment No 2 Page 38 of 64
net assets in a portfolio of the following types of floating-rate9 debt instruments issued by
US and non-US public- and private-sector entities floating-rate corporate10 and
government bonds and notes floating-rate agency securities 11 floating-rate instruments
of non-US issuers floating-rate privately-issued securities 12 floating-rate asset-backed
securities 13 floating-rate mortgage-backed securities14 floating-rate loans 15 and
9 For the avoidance of doubt the term ldquofloating-raterdquo shall also include similar terms such as ldquovariable-raterdquo and ldquoadjustable-raterdquo
10 The Adviser expects that under normal market conditions generally for a corporate bond to be considered as an eligible investment after taking into account such an investment at least 75 of the Fundrsquos net assets that are invested in floating-rate corporate bonds and as described below fixed-rate corporate bonds (in the aggregate) will be comprised of corporate bonds that have at the time of original issuance $100 million or more par amount outstanding
11 ldquoAgency securitiesrdquo for these purposes generally includes securities issued by the following entities Government National Mortgage Association (Ginnie Mae) Federal National Mortgage Association (Fannie Mae) Federal Home Loan Banks (FHLBanks) Federal Home Loan Mortgage Corporation (Freddie Mac) Farm Credit System (FCS) Farm Credit Banks (FCBanks) Student Loan Marketing Association (Sallie Mae) Resolution Funding Corporation (REFCORP) Financing Corporation (FICO) and the Farm Credit System (FCS) Financial Assistance Corporation (FAC) Agency securities can include but are not limited to mortgage-backed securities
12 ldquoPrivately-issued securitiesrdquo for these purposes generally includes Rule 144A securities other than mortgage-backed Rule 144A securities Under normal market conditions privately-issued securities will have at the time of original issuance $100 million or more principal amount outstanding to be considered eligible investments
13 Asset-backed securities are securities that are backed by a pool of assets The Fund currently intends to invest in asset-backed securities that are consumer asset-backed securities
14 Mortgage-backed securities which are securities that directly or indirectly represent a participation in or are secured by and payable from mortgage loans on real property will consist of (1) residential mortgage-backed securities (ldquoRMBSrdquo) (2) commercial mortgage-backed securities (ldquoCMBSrdquo) (3) stripped mortgage-backed securities (ldquoSMBSrdquo) which are mortgage-backed securities
SR-NASDAQ-2015-011 Amendment No 2 Page 39 of 64
investment companies16 (including investment companies advised by the Adviser) that
invest primarily in the foregoing types of debt instruments17 (collectively ldquoFloating Rate
Debt Instrumentsrdquo)
where mortgage payments are divided between paying the loanrsquos principal and paying the loanrsquos interest (4) collateralized mortgage obligations (ldquoCMOsrdquo) and real estate mortgage investment conduits (ldquoREMICsrdquo) which are mortgage-backed securities that are divided into multiple classes with each class being entitled to a different share of the principal and interest payments received from the pool of underlying assets
15 The floating-rate loans in which the Fund will invest will represent amounts borrowed by companies or other entities from banks and other lenders and a significant portion of such floating-rate loans may be rated below investment grade or unrated Floating-rate loans held by the Fund may be senior or subordinate obligations of the borrower and may or may not be secured by collateral First lien senior secured floating-rate loans are referred to herein as ldquosenior loansrdquo Floating-rate loans that are not senior loans (ie unsecured floating-rate loans and secured floating-rate loans that are not first lien floating-rate loans) are referred to herein as ldquojunior loansrdquo The Fund will generally invest in floating-rate loans that the Adviser deems to be liquid with readily available prices notwithstanding the foregoing the Fund may invest in floating-rate loans that are deemed illiquid so long as the Fund complies with the 15 limitation on investments of its net assets in illiquid assets described below under ldquoInvestment Restrictionsrdquo
16 The Fund currently anticipates investing only in registered open-end investment companies that are listed and traded in the US on registered exchanges (ie other ETFs) An ETF is an investment company registered under the 1940 Act that holds a portfolio of securities Many ETFs are designed to track the performance of a securities index including industry sector country and region indexes The Fund may invest in the securities of ETFs in excess of the limits imposed under the 1940 Act pursuant to exemptive orders obtained by other ETFs and their sponsors from the Commission In addition the Fund may invest in the securities of certain investment companies in excess of the limits imposed under the 1940 Act pursuant to an exemptive order obtained by the Trust and the Adviser from the Commission See Investment Company Act Release No 30377 (February 5 2013) (File No 812-13895) The ETFs in which the Fund may invest include Index Fund Shares (as described in Nasdaq Rule 5705) Portfolio Depository Receipts (as described in Nasdaq Rule 5705) and Managed Fund Shares (as described in Nasdaq Rule 5735) While the Fund may invest in inverse ETFs the Fund will not invest in leveraged or inverse leveraged (eg 2X or -3X) ETFs
SR-NASDAQ-2015-011 Amendment No 2 Page 40 of 64
At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade To be considered
ldquoinvestment graderdquo under normal market conditions rated Floating Rate Debt
Instruments will carry at the time of purchase a rating in the highest four rating
categories of at least one nationally recognized statistical ratings organization
(ldquoNRSROrdquo) (eg BBB- or higher by Standard amp Poorrsquos Ratings Services (ldquoSampPrdquo)
andor Fitch Ratings (ldquoFitchrdquo) or Baa3 or higher by Moodyrsquos Investors Service Inc
(ldquoMoodyrsquosrdquo)18 For unrated securities to be considered ldquoinvestment graderdquo under normal
market conditions such securities will be determined at the time of purchase to be of
comparable quality19 by the Adviser The Fund may invest up to 35 of its net assets in
securities that are at the time of investment rated below investment grade by each
NRSRO rating such securities (or securities that are unrated and determined by the
17 The liquidity of a security especially in the case of asset-backed and mortgage-backed securities will be a substantial factor in the Fundrsquos security selection process Consistent with the discussion below under ldquoInvestment Restrictionsrdquo the Fund will not purchase any Floating Rate Debt Instruments (including asset-backed securities and mortgage-backed securities) that in the Adviserrsquos opinion are illiquid if as a result more than 15 of the value of the Fundrsquos net assets will be invested in illiquid assets
18 For the avoidance of doubt if a security is rated by multiple NRSROs and receives different ratings the Fund will treat the security as being rated in the highest rating category received from an NRSRO
19 Comparable quality of unrated securities will be determined by the Adviser based on fundamental credit analysis of the unrated security and comparable NRSRO-rated securities On a best efforts basis the Adviser will attempt to make a rating determination based on publicly available data In making a ldquocomparable qualityrdquo determination the Adviser may consider for example whether the issuer of the security has issued other rated securities the nature and provisions of the relevant security whether the obligations under the relevant security are guaranteed by another entity and the rating of such guarantor (if any) relevant cash flows macroeconomic analysis andor sector or industry analysis
SR-NASDAQ-2015-011 Amendment No 2 Page 41 of 64
Adviser to be of comparable quality) commonly referred to as ldquohigh yieldrdquo or ldquojunkrdquo
bonds If subsequent to purchase by the Fund a security held by the Fund experiences a
decline in credit quality and falls below investment grade the Fund may continue to hold
the security and it will not cause the Fund to violate the 35 investment limitation
however the security will be taken into account for purposes of determining whether
purchases of additional securities will cause the Fund to violate such limitation
The Fund will limit its investments in asset-backed securities (excluding agency
mortgage-backed securities) and non-agency mortgage-backed securities (in the
aggregate) to 20 of its net assets20 In addition the Fund will limit its investments in
junior loans to 20 of its net assets
The Fund will hold debt securities (including in the aggregate Floating Rate
Debt Instruments and the fixed-rate debt securities described below) of at least 13
non-affiliated issuers
Other Investments
Under normal market conditions the Fund will invest primarily in the Floating
Rate Debt Instruments described above to meet its investment objective In addition the
Fund may invest up to 20 of its net assets in the following types of fixed-rate debt
securities corporate21 and government bonds and notes agency securities22 instruments
20 For the avoidance of doubt there is no limitation on the Fundrsquos investments in agency mortgage-backed securities
21 See footnote 10 above
22 See footnote 11 above
SR-NASDAQ-2015-011 Amendment No 2 Page 42 of 64
of non-US issuers in developed markets privately-issued securities 23 asset-backed
securities 24 mortgage-backed securities 25 municipal bonds money market securities26
and investment companies27 (including investment companies advised by the Adviser)
that invest primarily in the foregoing types of debt securities
Further to pursue its investment objective the Fund may invest up to 20 of the
value of its net assets in exchange-listed options on US Treasury futures contracts and
exchange-listed US Treasury futures contracts28 The use of these derivative
transactions may allow the Fund to obtain net long or short exposures to selected interest
rates These derivatives may also be used to hedge risks including interest rate risks and
credit risks associated with the Fundrsquos portfolio investments The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
23 See footnote 12 above
24 See footnote 13 above
25 See footnote 14 above
26 ldquoMoney market securitiesrdquo for these purposes generally includes short-term high-quality obligations issued or guaranteed by the US Treasury or the agencies or instrumentalities of the US government short-term high-quality securities issued or guaranteed by non-US governments agencies and instrumentalities repurchase agreements commercial paper (both asset-backed and non-assetshybacked) and deposits and other obligations of US and non-US banks and financial institutions
27 See footnote 16 above
28 At least 90 of the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be invested in instruments that trade in markets that are members of the Intermarket Surveillance Group (ldquoISGrdquo) (see footnote 40 below) or are parties to a comprehensive surveillance sharing agreement with the Exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 43 of 64
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index
Investment Restrictions
The Fund will not invest 25 or more of the value of its total assets in securities
of issuers in any one industry This restriction does not apply to (a) obligations issued or
guaranteed by the US government its agencies or instrumentalities or (b) securities of
other investment companies29
The Fund may hold up to an aggregate amount of 15 of its net assets in illiquid
assets (calculated at the time of investment) including Rule 144A securities deemed
illiquid by the Adviser30 The Fund will monitor its portfolio liquidity on an ongoing
basis to determine whether in light of current circumstances an adequate level of
liquidity is being maintained and will consider taking appropriate steps in order to
maintain adequate liquidity if through a change in values net assets or other
circumstances more than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid
assets include securities subject to contractual or other restrictions on resale and other
29 See Form N-1A Item 9 The Commission has taken the position that a fund is concentrated if it invests more than 25 of the value of its total assets in any one industry See eg Investment Company Act Release No 9011 (October 30 1975) 40 FR 54241 (November 21 1975)
30 In reaching liquidity decisions the Adviser may consider the following factors the frequency of trades and quotes for the security the number of dealers wishing to purchase or sell the security and the number of other potential purchasers dealer undertakings to make a market in the security and the nature of the security and the nature of the marketplace in which it trades (eg the time needed to dispose of the security the method of soliciting offers and the mechanics of transfer)
SR-NASDAQ-2015-011 Amendment No 2 Page 44 of 64
instruments that lack readily available markets as determined in accordance with
Commission staff guidance31
The Fund will not invest in non-US equity securities
Creation and Redemption of Shares
The Fund will issue and redeem Shares on a continuous basis at net asset value
(ldquoNAVrdquo)32 only in large blocks of Shares (ldquoCreation Unitsrdquo) in transactions with
authorized participants generally including broker-dealers and large institutional
investors (ldquoAuthorized Participantsrdquo) Creation Units generally will consist of 50000
Shares although this may change from time to time Creation Units however are not
expected to consist of less than 50000 Shares As described in the Registration
Statement and consistent with the Exemptive Relief the Fund will issue and redeem
Creation Units in exchange for an in-kind portfolio of instruments andor cash in lieu of
31 The Commission has stated that long-standing Commission guidelines have required open-end funds to hold no more than 15 of their net assets in illiquid securities and other illiquid assets See Investment Company Act Release No 28193 (March 11 2008) 73 FR 14618 (March 18 2008) footnote 34 See also Investment Company Act Release No 5847 (October 21 1969) 35 FR 19989 (December 31 1970) (Statement Regarding ldquoRestricted Securitiesrdquo) Investment Company Act Release No 18612 (March 12 1992) 57 FR 9828 (March 20 1992) (Revisions of Guidelines to Form N-1A) A fundrsquos portfolio security is illiquid if it cannot be disposed of in the ordinary course of business within seven days at approximately the value ascribed to it by the fund See Investment Company Act Release No 14983 (March 12 1986) 51 FR 9773 (March 21 1986) (adopting amendments to Rule 2a-7 under the 1940 Act) Investment Company Act Release No 17452 (April 23 1990) 55 FR 17933 (April 30 1990) (adopting Rule 144A under the Securities Act of 1933)
32 The NAV of the Fundrsquos Shares generally will be calculated once daily Monday through Friday as of the close of regular trading on the New York Stock Exchange generally 400 pm Eastern Time (the ldquoNAV Calculation Timerdquo) NAV per Share will be calculated by dividing the Fundrsquos net assets by the number of Fund Shares outstanding For more information regarding the valuation of Fund investments in calculating the Fundrsquos NAV see the Registration Statement
SR-NASDAQ-2015-011 Amendment No 2 Page 45 of 64
such instruments (the ldquoCreation Basketrdquo) In addition if there is a difference between the
NAV attributable to a Creation Unit and the market value of the Creation Basket
exchanged for the Creation Unit the party conveying instruments with the lower value
will pay to the other an amount in cash equal to the difference (referred to as the ldquoCash
Componentrdquo)
Creations and redemptions must be made by or through an Authorized Participant
that has executed an agreement that has been agreed to by the Distributor and BNY with
respect to creations and redemptions of Creation Units All standard orders to create
Creation Units must be received by the transfer agent no later than the closing time of the
regular trading session on the New York Stock Exchange (ordinarily 400 pm Eastern
Time) (the ldquoClosing Timerdquo) in each case on the date such order is placed in order for the
creation of Creation Units to be effected based on the NAV of Shares as next determined
on such date after receipt of the order in proper form Shares may be redeemed only in
Creation Units at their NAV next determined after receipt not later than the Closing Time
of a redemption request in proper form by the Fund through the transfer agent and only
on a business day
The Fundrsquos custodian through the National Securities Clearing Corporation will
make available on each business day prior to the opening of business of the Exchange
the list of the names and quantities of the instruments comprising the Creation Basket as
well as the estimated Cash Component (if any) for that day The published Creation
Basket will apply until a new Creation Basket is announced on the following business
day prior to commencement of trading in the Shares
SR-NASDAQ-2015-011 Amendment No 2 Page 46 of 64
Net Asset Value
The Fundrsquos NAV will be determined as of the close of trading (normally
400 pm Eastern Time) on each day the New York Stock Exchange is open for
business NAV will be calculated for the Fund by taking the market price of the Fundrsquos
total assets including interest or dividends accrued but not yet collected less all
liabilities and dividing such amount by the total number of Shares outstanding The
result rounded to the nearest cent will be the NAV per Share All valuations will be
subject to review by the Board of Trustees of the Trust (ldquoTrust Boardrdquo) or its delegate
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with valuation procedures (which may be revised from time to time) adopted by the Trust
Board (the ldquoValuation Proceduresrdquo) and in accordance with the 1940 Act A market
valuation generally means a valuation (i) obtained from an exchange an independent
pricing service (ldquoPricing Servicerdquo) or a major market maker (or dealer) or (ii) based on a
price quotation or other equivalent indication of value supplied by an exchange a Pricing
Service or a major market maker (or dealer) The information summarized below is
based on the Valuation Procedures as currently in effect however as noted above the
Valuation Procedures are amended from time to time and therefore such information is
subject to change
Certain securities including Floating Rate Debt Instruments in which the Fund
may invest will not be listed on any securities exchange or board of trade Such
securities will typically be bought and sold by institutional investors in individually
negotiated private transactions that function in many respects like an over-the-counter
SR-NASDAQ-2015-011 Amendment No 2 Page 47 of 64
secondary market although typically no formal market makers will exist Certain
securities particularly debt securities will have few or no trades or trade infrequently
and information regarding a specific security may not be widely available or may be
incomplete Accordingly determinations of the fair value of debt securities may be
based on infrequent and dated information Because there is less reliable objective data
available elements of judgment may play a greater role in valuation of debt securities
than for other types of securities Typically Floating Rate Debt Instruments and other
debt securities in which the Fund may invest (other than those described below) will be
valued using information provided by a Pricing Service Debt securities having a
remaining maturity of 60 days or less when purchased will be valued at cost adjusted for
amortization of premiums and accretion of discounts provided the Adviserrsquos pricing
committee (the ldquoPricing Committeerdquo) has determined that the use of amortized cost is an
appropriate reflection of fair value given market and issuer-specific conditions existing at
the time of the determination Overnight repurchase agreements will be valued at cost
and term repurchase agreements (ie those whose maturity exceeds seven days) will be
valued at the average of the bid quotations obtained daily from at least two recognized
dealers
Asset-backed and mortgage-backed securities will generally be valued by using a
Pricing Service If a Pricing Service does not cover a particular asset-backed or
mortgage-backed security or discontinues covering a particular asset-backed or
mortgage-backed security the security will be priced using broker quotes generally
provided by brokers that make or participate in markets in the security To derive values
Pricing Services and broker-dealers may use matrix pricing and valuation models as well
SR-NASDAQ-2015-011 Amendment No 2 Page 48 of 64
as recent market transactions for the same or similar assets As it deems appropriate the
Pricing Committee may determine that a Pricing Service price does not represent an
accurate value of an asset-backed or mortgage-backed security based on broker quotes it
receives a recent trade in the security by the Fund information from a portfolio manager
or other market information In the event that the Pricing Committee determines that the
Pricing Service price is unreliable or inaccurate based on such other information broker
quotes may be used Additionally if the Pricing Committee determines that the price of
an asset-backed or mortgage-backed security obtained from a Pricing Service and
available broker quotes is unreliable or inaccurate due to market conditions or other
reasons or if a Pricing Service price or broker quote is unavailable the security will be
valued using fair value pricing as described below
Equity securities listed on any exchange other than the Exchange will be valued at
the last sale price on the exchange on which they are principally traded on the business
day as of which such value is being determined Equity securities listed on the Exchange
will be valued at the official closing price on the business day as of which such value is
being determined If there has been no sale on such day or no official closing price in
the case of securities traded on the Exchange the securities will be valued using fair
value pricing as described below Equity securities traded on more than one securities
exchange will be valued at the last sale price or official closing price as applicable on
the business day as of which such value is being determined at the close of the exchange
representing the principal market for such securities
Exchange-traded options and futures contracts will be valued at the closing price
in the market where such contracts are principally traded
SR-NASDAQ-2015-011 Amendment No 2 Page 49 of 64
Certain securities including Floating Rate Debt Instruments in which the Fund
will invest will not be able to be priced by pre-established pricing methods Such
securities may be valued by the Trust Board or its delegate at fair value The use of fair
value pricing by the Fund will be governed by the Valuation Procedures and conducted in
accordance with the provisions of the 1940 Act Valuing the Fundrsquos securities using fair
value pricing will result in using prices for those securities that may differ from current
market valuations or official closing prices on the applicable exchange
Availability of Information
The Fundrsquos website (wwwftportfolioscom) which will be publicly available
prior to the public offering of Shares will include a form of the prospectus for the Fund
that may be downloaded The website will include the Sharesrsquo ticker CUSIP and
exchange information along with additional quantitative information updated on a daily
basis including for the Fund (1) daily trading volume the prior business dayrsquos reported
NAV and closing price mid-point of the bidask spread at the time of calculation of such
NAV (the ldquoBidAsk Pricerdquo)33 and a calculation of the premium and discount of the
BidAsk Price against the NAV and (2) data in chart format displaying the frequency
distribution of discounts and premiums of the daily BidAsk Price against the NAV
within appropriate ranges for each of the four previous calendar quarters On each
business day before commencement of trading in Shares in the Regular Market Session34
33 The BidAsk Price of the Fund will be determined using the mid-point of the highest bid and the lowest offer on the Exchange as of the time of calculation of the Fundrsquos NAV The records relating to BidAsk Prices will be retained by the Fund and its service providers
34 See Nasdaq Rule 4120(b)(4) (describing the three trading sessions on the Exchange (1) Pre-Market Session from 4 am to 930 am Eastern Time (2)
SR-NASDAQ-2015-011 Amendment No 2 Page 50 of 64
on the Exchange the Fund will disclose on its website the identities and quantities of the
portfolio of securities and other assets (the ldquoDisclosed Portfoliordquo as defined in Nasdaq
Rule 5735(c)(2)) held by the Fund that will form the basis for the Fundrsquos calculation of
NAV at the end of the business day 35 The Fundrsquos disclosure of derivative positions in
the Disclosed Portfolio will include information that market participants can use to value
these positions intraday On a daily basis the Fund will disclose on the Fundrsquos website
the following information regarding each portfolio holding as applicable to the type of
holding ticker symbol CUSIP number or other identifier if any a description of the
holding (including the type of holding) the identity of the security or other asset or
instrument underlying the holding if any for options the option strike price quantity
held (as measured by for example par value notional value or number of shares
contracts or units) maturity date if any coupon rate if any effective date if any market
value of the holding and percentage weighting of the holding in the Fundrsquos portfolio
The website information will be publicly available at no charge
In addition for the Fund an estimated value defined in Rule 5735(c)(3) as the
ldquoIntraday Indicative Valuerdquo that reflects an estimated intraday value of the Fundrsquos
Disclosed Portfolio will be disseminated Moreover the Intraday Indicative Value
Regular Market Session from 930 am to 4 pm or 415 pm Eastern Time and (3) Post-Market Session from 4 pm or 415 pm to 8 pm Eastern Time)
Under accounting procedures to be followed by the Fund trades made on the prior business day (ldquoTrdquo) will be booked and reflected in NAV on the current business day (ldquoT+1rdquo) Accordingly the Fund will be able to disclose at the beginning of the business day the portfolio that will form the basis for the NAV calculation at the end of the business day
35
SR-NASDAQ-2015-011 Amendment No 2 Page 51 of 64
available on the NASDAQ OMX Information LLC proprietary index data service36 will
be based upon the current value for the components of the Disclosed Portfolio and will be
updated and widely disseminated by one or more major market data vendors and broadly
displayed at least every 15 seconds during the Regular Market Session The Intraday
Indicative Value will be based on quotes and closing prices from the securitiesrsquo local
market and may not reflect events that occur subsequent to the local marketrsquos close
Premiums and discounts between the Intraday Indicative Value and the market price may
occur This should not be viewed as a ldquoreal timerdquo update of the NAV per Share of the
Fund which is calculated only once a day
The dissemination of the Intraday Indicative Value together with the Disclosed
Portfolio will allow investors to determine the value of the underlying portfolio of the
Fund on a daily basis and will provide a close estimate of that value throughout the
trading day
Investors will also be able to obtain the Fundrsquos Statement of Additional
Information (ldquoSAIrdquo) the Fundrsquos annual and semi-annual reports (together ldquoShareholder
Reportsrdquo) and its Form N-CSR and Form N-SAR filed twice a year The Fundrsquos SAI
and Shareholder Reports will be available free upon request from the Fund and those
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or
downloaded from the Commissionrsquos website at wwwsecgov Information regarding
Currently the NASDAQ OMX Global Index Data Service (ldquoGIDSrdquo) is the NASDAQ OMX global index data feed service offering real-time updates daily summary messages and access to widely followed indexes and Intraday Indicative Values for ETFs GIDS provides investment professionals with the daily information needed to track or trade NASDAQ OMX indexes listed ETFs or third-party partner indexes and ETFs
36
SR-NASDAQ-2015-011 Amendment No 2 Page 52 of 64
market price and trading volume of the Shares will be continually available on a real-time
basis throughout the day on brokersrsquo computer screens and other electronic services
Information regarding the previous dayrsquos closing price and trading volume information
for the Shares will be published daily in the financial section of newspapers Quotation
and last sale information for the Shares will be available via Nasdaq proprietary quote
and trade services as well as in accordance with the Unlisted Trading Privileges and the
Consolidated Tape Association (ldquoCTArdquo) plans for the Shares Quotation and last sale
information for the other ETFs in which the Fund will invest will be available via the
quote and trade services of their respective primary exchanges as well as in accordance
with the Unlisted Trading Privileges and the CTA plans as applicable Quotation and
last sale information for US exchange-traded options will be available via the Options
Price Reporting Authority Intraday executable price quotations on Floating Rate Debt
Instruments and other assets not traded on an exchange will be available from major
broker-dealer firms or market data vendors as well as from automated quotation systems
published or other public sources or online information services Additionally the Trade
Reporting and Compliance Engine (ldquoTRACErdquo) of the Financial Industry Regulatory
Authority (ldquoFINRArdquo) will be a source of price information for corporate bonds
privately-issued securities mortgage-backed securities and asset-backed securities to the
extent transactions in such securities are reported to TRACE37 For exchange-traded
Broker-dealers that are FINRA member firms have an obligation to report transactions in specified debt securities to TRACE to the extent required under applicable FINRA rules Generally such debt securities will have at issuance a maturity that exceeds one calendar year
37
SR-NASDAQ-2015-011 Amendment No 2 Page 53 of 64
assets intraday pricing information will be available directly from the applicable listing
exchange
Additional information regarding the Fund and the Shares including investment
strategies risks creation and redemption procedures fees Fund holdings disclosure
policies distributions and taxes will be included in the Registration Statement
Initial and Continued Listing
The Shares will be subject to Rule 5735 which sets forth the initial and continued
listing criteria applicable to Managed Fund Shares The Exchange represents that for
initial andor continued listing the Fund must be in compliance with Rule 10A-338 under
the Act A minimum of 100000 Shares will be outstanding at the commencement of
trading on the Exchange The Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the NAV and the
Disclosed Portfolio will be made available to all market participants at the same time
Trading Halts
With respect to trading halts the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading in the Shares of the Fund Nasdaq will
halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12) Trading may be
halted because of market conditions or for reasons that in the view of the Exchange
make trading in the Shares inadvisable These may include (1) the extent to which
trading is not occurring in the securities andor the other assets constituting the Disclosed
Portfolio of the Fund or (2) whether other unusual conditions or circumstances
See 17 CFR 24010A-3 38
SR-NASDAQ-2015-011 Amendment No 2 Page 54 of 64
detrimental to the maintenance of a fair and orderly market are present Trading in the
Shares also will be subject to Rule 5735(d)(2)(D) which sets forth circumstances under
which Shares of the Fund may be halted
Trading Rules
Nasdaq deems the Shares to be equity securities thus rendering trading in the
Shares subject to Nasdaqrsquos existing rules governing the trading of equity securities
Nasdaq will allow trading in the Shares from 400 am until 800 pm Eastern Time
The Exchange has appropriate rules to facilitate transactions in the Shares during all
trading sessions As provided in Nasdaq Rule 5735(b)(3) the minimum price variation
for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $001
Surveillance
The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws39 The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities laws
The surveillances referred to above generally focus on detecting securities trading
outside their normal patterns which could be indicative of manipulative or other violative
activity When such situations are detected surveillance analysis follows and
FINRA surveils trading on the Exchange pursuant to a regulatory services agreement The Exchange is responsible for FINRArsquos performance under this regulatory services agreement
39
SR-NASDAQ-2015-011 Amendment No 2 Page 55 of 64
investigations are opened where appropriate to review the behavior of all relevant
parties for all relevant trading violations
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 56 of 64
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
SR-NASDAQ-2015-011 Amendment No 2 Page 57 of 64
2 Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
SR-NASDAQ-2015-011 Amendment No 2 Page 58 of 64
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
SR-NASDAQ-2015-011 Amendment No 2 Page 59 of 64
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
SR-NASDAQ-2015-011 Amendment No 2 Page 60 of 64
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 61 of 64
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
SR-NASDAQ-2015-011 Amendment No 2 Page 62 of 64
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
B Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
C Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received From Members Participants or Others
Written comments were neither solicited nor received
III Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Within 45 days of the date of publication of this notice in the Federal Register or
within such longer period (i) as the Commission may designate up to 90 days of such date
if it finds such longer period to be appropriate and publishes its reasons for so finding or
(ii) as to which the Exchange consents the Commission shall (a) by order approve or
disapprove such proposed rule change or (b) institute proceedings to determine whether
the proposed rule change should be disapproved
SR-NASDAQ-2015-011 Amendment No 2 Page 63 of 64
IV Solicitation of Comments
Interested persons are invited to submit written data views and arguments
concerning the foregoing including whether the proposed rule change is consistent with
the Act Comments may be submitted by any of the following methods
Electronic comments
bull Use the Commissionrsquos Internet comment form
(httpwwwsecgovrulessroshtml) or
bull Send an e-mail to rule-commentssecgov Please include File Number
SR-NASDAQ-2015-011 on the subject line
Paper comments
bull Send paper comments in triplicate to Brent J Fields Secretary Securities and
Exchange Commission Station Place 100 F Street NE Washington DC
20549-9303
All submissions should refer to File Number SR-NASDAQ-2015-011 This file number
should be included on the subject line if e-mail is used To help the Commission process
and review your comments more efficiently please use only one method The
Commission will post all comments on the Commissionrsquos Internet website
httpwwwsecgovrulessroshtml
Copies of the submission all subsequent amendments all written statements with
respect to the proposed rule change that are filed with the Commission and all written
communications relating to the proposed rule change between the Commission and any
person other than those that may be withheld from the public in accordance with the
provisions of 5 USC 552 will be available for website viewing and printing in the
Commissionrsquos Public Reference Room 100 F Street NE Washington DC 20549 on
SR-NASDAQ-2015-011 Amendment No 2 Page 64 of 64
official business days between the hours of 1000 am and 300 pm Copies of the filing
also will be available for inspection and copying at the principal office of Nasdaq All
comments received will be posted without change the Commission does not edit
personal identifying information from submissions You should submit only information
that you wish to make available publicly
All submissions should refer to File Number SR-NASDAQ-2015-011 and should
be submitted on or before [insert date 21 days from publication in the Federal Register]
For the Commission by the Division of Trading and Markets pursuant to
delegated authority41
Kevin M OrsquoNeill Deputy Secretary
17 CFR 20030-3(a)(12) 41
SR-NASDAQ-2015-011 Amendment No 2 Page 26 of 64
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
SR-NASDAQ-2015-011 Amendment No 2 Page 27 of 64
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
SR-NASDAQ-2015-011 Amendment No 2 Page 28 of 64
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
SR-NASDAQ-2015-011 Amendment No 2 Page 29 of 64
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
SR-NASDAQ-2015-011 Amendment No 2 Page 30 of 64
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
SR-NASDAQ-2015-011 Amendment No 2 Page 31 of 64
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
4 Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
5 Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received from Members Participants or Others
Written comments were neither solicited nor received
6 Extension of Time Period for Commission Action
The Exchange does not consent at this time to an extension of any time period for
Commission action
7 Basis for Summary Effectiveness Pursuant to Section 19(b)(3) or for Accelerated Effectiveness Pursuant to Section 19(b)(2)
Not applicable
8 Proposed Rule Change Based on Rules of Another Self-Regulatory Organization or of the Commission
Not applicable
9 Security-Based Swap Submissions Filed Pursuant to Section 3C of the Act
Not applicable
SR-NASDAQ-2015-011 Amendment No 2 Page 32 of 64
10 Advance Notices Filed Pursuant to Section 806(e) of the Payment Clearing and Settlement Supervision Act
Not applicable
11 Exhibits
1 Completed notice of proposed rule change for publication in the Federal
Register
SR-NASDAQ-2015-011 Amendment No 2 Page 33 of 64
EXHIBIT 1
SECURITIES AND EXCHANGE COMMISSION (Release No 34shy File No SR-NASDAQ-2015-011)
April __ 2015
Self-Regulatory Organizations The NASDAQ Stock Market LLC Notice of Filing of Proposed Rule Change Relating to the Listing and Trading of the Shares of the First Trust Strategic Floating Rate ETF of First Trust Exchange-Traded Fund IV
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (ldquoActrdquo)1 and
Rule 19b-4 thereunder2 notice is hereby given that on February 12 2015 The NASDAQ
Stock Market LLC (ldquoNasdaqrdquo or the ldquoExchangerdquo) filed with the Securities and Exchange
Commission (ldquoCommissionrdquo) the proposed rule change as described in in Items I II and
III below which Items have been prepared by Nasdaq On April 6 2015 Nasdaq filed
Amendment No 1 which replaced the text of the original filing in its entirety On April
15 2015 Nasdaq filed Amendment No 2 which replaced the text of the original filing in
its entirety The Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons
I Self-Regulatory Organizationrsquos Statement of the Terms of Substance of the Proposed Rule Change
Nasdaq proposes to list and trade the shares of the First Trust Strategic Floating
Rate ETF (the ldquoFundrdquo) of the First Trust Strategic Floating Rate ETF (the ldquoFundrdquo) of
First Trust Exchange-Traded Fund IV (the ldquoTrustrdquo) under Nasdaq Rule 5735 (ldquoManaged
1 15 USC 78s(b)(1)
2 17 CFR 24019b-4
SR-NASDAQ-2015-011 Amendment No 2 Page 34 of 64
Fund Sharesrdquo)3 The shares of the Fund are collectively referred to herein as the
ldquoSharesrdquo
The text of the proposed rule change is available at
httpnasdaqcchwallstreetcom at Nasdaqrsquos principal office and at the Commissionrsquos
Public Reference Room
II Self-Regulatory Organizationrsquos Statement of the Purpose of and Statutory Basis for the Proposed Rule Change
In its filing with the Commission Nasdaq included statements concerning the
purpose of and basis for the proposed rule change The text of these statements may be
examined at the places specified in Item IV below Nasdaq has prepared summaries set
forth in Sections A B and C below of the most significant aspects of such statements
A Self-Regulatory Organizationrsquos Statement of the Purpose of and Statutory Basis for the Proposed Rule Change
1 Purpose
The Exchange proposes to list and trade the Shares of the Fund under Nasdaq
Rule 5735 which governs the listing and trading of Managed Fund Shares4 on the
3 The Commission approved Nasdaq Rule 5735 in Securities Exchange Act Release No 57962 (June 13 2008) 73 FR 35175 (June 20 2008) (SR-NASDAQ-2008shy039) There are already multiple actively-managed funds listed on the Exchange see eg Securities Exchange Act Release Nos 69464 (April 26 2013) 78 FR 25774 (May 2 2013) (SR-NASDAQ-2013-036) (order approving listing and trading of First Trust Senior Loan Fund) 68972 (February 22 2013) 78 FR 13721 (February 28 2013) (SR-NASDAQ-2012-147) (order approving listing and trading of First Trust High Yield LongShort ETF) 66489 (February 29 2012) 77 FR 13379 (March 6 2012) (SR-NASDAQ-2012-004) (order approving listing and trading of WisdomTree Emerging Markets Corporate Bond Fund) The Exchange believes the proposed rule change raises no significant issues not previously addressed in those prior Commission orders
4 A Managed Fund Share is a security that represents an interest in an investment company registered under the Investment Company Act of 1940 (15 USC 80ashy
SR-NASDAQ-2015-011 Amendment No 2 Page 35 of 64
Exchange The Fund will be an actively-managed exchange-traded fund (ldquoETFrdquo) The
Shares will be offered by the Trust which was established as a Massachusetts business
trust on September 15 20105 The Trust is registered with the Commission as an
investment company and has filed a registration statement on Form N-1A (ldquoRegistration
Statementrdquo) with the Commission6 The Fund will be a series of the Trust The Fund
intends to qualify each year as a regulated investment company (ldquoRICrdquo) under
Subchapter M of the Internal Revenue Code of 1986 as amended
First Trust Advisors LP will be the investment adviser (ldquoAdviserrdquo) to the Fund
First Trust Portfolios LP (the ldquoDistributorrdquo) will be the principal underwriter and
distributor of the Fundrsquos Shares The Bank of New York Mellon Corporation (ldquoBNYrdquo)
will act as the administrator accounting agent custodian and transfer agent to the Fund
1) (the ldquo1940 Actrdquo) organized as an open-end investment company or similar entity that invests in a portfolio of securities selected by its investment adviser consistent with its investment objectives and policies In contrast an open-end investment company that issues Index Fund Shares listed and traded on the Exchange under Nasdaq Rule 5705 seeks to provide investment results that correspond generally to the price and yield performance of a specific foreign or domestic stock index fixed income securities index or combination thereof
5 The Commission has issued an order upon which the Trust may rely granting certain exemptive relief under the 1940 Act See Investment Company Act Release No 30029 (April 10 2012) (File No 812-13795) (the ldquoExemptive Reliefrdquo) In addition the Commission has issued no-action relief upon which the Trust may rely pertaining to the Fundrsquos ability to invest in derivatives notwithstanding certain representations in the application for the Exemptive Relief See Commission No-Action Letter (December 6 2012)
6 See Post-Effective Amendment No 104 to Registration Statement on Form N-1A for the Trust dated January 29 2015 (File Nos 333-174332 and 811-22559) The descriptions of the Fund and the Shares contained herein are based in part on information in the Registration Statement
7
SR-NASDAQ-2015-011 Amendment No 2 Page 36 of 64
Paragraph (g) of Rule 5735 provides that if the investment adviser to the
investment company issuing Managed Fund Shares is affiliated with a broker-dealer
such investment adviser shall erect a ldquofire wallrdquo between the investment adviser and the
broker-dealer with respect to access to information concerning the composition andor
changes to such investment company portfolio7 In addition paragraph (g) further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio Rule 5735(g) is similar
to Nasdaq Rule 5705(b)(5)(A)(i) however paragraph (g) in connection with the
establishment of a ldquofire wallrdquo between the investment adviser and the broker-dealer
reflects the applicable open-end fundrsquos portfolio not an underlying benchmark index as
is the case with index-based funds The Adviser is not a broker-dealer although it is
affiliated with the Distributor a broker-dealer The Adviser has implemented a fire wall
An investment adviser to an open-end fund is required to be registered under the Investment Advisers Act of 1940 (the ldquoAdvisers Actrdquo) As a result the Adviser and its related personnel are subject to the provisions of Rule 204A-1 under the Advisers Act relating to codes of ethics This Rule requires investment advisers to adopt a code of ethics that reflects the fiduciary nature of the relationship to clients as well as compliance with other applicable securities laws Accordingly procedures designed to prevent the communication and misuse of non-public information by an investment adviser must be consistent with Rule 204A-1 under the Advisers Act In addition Rule 206(4)-7 under the Advisers Act makes it unlawful for an investment adviser to provide investment advice to clients unless such investment adviser has (i) adopted and implemented written policies and procedures reasonably designed to prevent violation by the investment adviser and its supervised persons of the Advisers Act and the Commission rules adopted thereunder (ii) implemented at a minimum an annual review regarding the adequacy of the policies and procedures established pursuant to subparagraph (i) above and the effectiveness of their implementation and (iii) designated an individual (who is a supervised person) responsible for administering the policies and procedures adopted under subparagraph (i) above
8
SR-NASDAQ-2015-011 Amendment No 2 Page 37 of 64
with respect to its broker-dealer affiliate regarding access to information concerning the
composition andor changes to the portfolio In addition personnel who make decisions
on the Fundrsquos portfolio composition will be subject to procedures designed to prevent the
use and dissemination of material non-public information regarding the Fundrsquos portfolio
In the event (a) the Adviser becomes or becomes newly affiliated with a broker-dealer
or (b) any new adviser or sub-adviser is a registered broker-dealer or becomes affiliated
with another broker-dealer it will implement a fire wall with respect to its relevant
personnel andor such broker-dealer affiliate as applicable regarding access to
information concerning the composition andor changes to the portfolio and will be
subject to procedures designed to prevent the use and dissemination of material
non-public information regarding such portfolio The Fund does not currently intend to
use a sub-adviser
First Trust Strategic Floating Rate ETF
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions8 at least 80 of its
The term ldquounder normal market conditionsrdquo as used herein includes but is not limited to the absence of adverse market economic political or other conditions including extreme volatility or trading halts in the fixed income markets or the financial markets generally operational issues causing dissemination of inaccurate market information or force majeure type events such as systems failure natural or man-made disaster act of God armed conflict act of terrorism riot or labor disruption or any similar intervening circumstance For temporary defensive purposes during the initial invest-up period and during periods of high cash inflows or outflows the Fund may depart from its principal investment strategies for example it may hold a higher than normal proportion of its assets in cash During such periods the Fund may not be able to achieve its investment objective The Fund may adopt a defensive strategy when the Adviser believes securities in which the Fund normally invests have elevated risks due to political or economic factors and in other extraordinary circumstances
SR-NASDAQ-2015-011 Amendment No 2 Page 38 of 64
net assets in a portfolio of the following types of floating-rate9 debt instruments issued by
US and non-US public- and private-sector entities floating-rate corporate10 and
government bonds and notes floating-rate agency securities 11 floating-rate instruments
of non-US issuers floating-rate privately-issued securities 12 floating-rate asset-backed
securities 13 floating-rate mortgage-backed securities14 floating-rate loans 15 and
9 For the avoidance of doubt the term ldquofloating-raterdquo shall also include similar terms such as ldquovariable-raterdquo and ldquoadjustable-raterdquo
10 The Adviser expects that under normal market conditions generally for a corporate bond to be considered as an eligible investment after taking into account such an investment at least 75 of the Fundrsquos net assets that are invested in floating-rate corporate bonds and as described below fixed-rate corporate bonds (in the aggregate) will be comprised of corporate bonds that have at the time of original issuance $100 million or more par amount outstanding
11 ldquoAgency securitiesrdquo for these purposes generally includes securities issued by the following entities Government National Mortgage Association (Ginnie Mae) Federal National Mortgage Association (Fannie Mae) Federal Home Loan Banks (FHLBanks) Federal Home Loan Mortgage Corporation (Freddie Mac) Farm Credit System (FCS) Farm Credit Banks (FCBanks) Student Loan Marketing Association (Sallie Mae) Resolution Funding Corporation (REFCORP) Financing Corporation (FICO) and the Farm Credit System (FCS) Financial Assistance Corporation (FAC) Agency securities can include but are not limited to mortgage-backed securities
12 ldquoPrivately-issued securitiesrdquo for these purposes generally includes Rule 144A securities other than mortgage-backed Rule 144A securities Under normal market conditions privately-issued securities will have at the time of original issuance $100 million or more principal amount outstanding to be considered eligible investments
13 Asset-backed securities are securities that are backed by a pool of assets The Fund currently intends to invest in asset-backed securities that are consumer asset-backed securities
14 Mortgage-backed securities which are securities that directly or indirectly represent a participation in or are secured by and payable from mortgage loans on real property will consist of (1) residential mortgage-backed securities (ldquoRMBSrdquo) (2) commercial mortgage-backed securities (ldquoCMBSrdquo) (3) stripped mortgage-backed securities (ldquoSMBSrdquo) which are mortgage-backed securities
SR-NASDAQ-2015-011 Amendment No 2 Page 39 of 64
investment companies16 (including investment companies advised by the Adviser) that
invest primarily in the foregoing types of debt instruments17 (collectively ldquoFloating Rate
Debt Instrumentsrdquo)
where mortgage payments are divided between paying the loanrsquos principal and paying the loanrsquos interest (4) collateralized mortgage obligations (ldquoCMOsrdquo) and real estate mortgage investment conduits (ldquoREMICsrdquo) which are mortgage-backed securities that are divided into multiple classes with each class being entitled to a different share of the principal and interest payments received from the pool of underlying assets
15 The floating-rate loans in which the Fund will invest will represent amounts borrowed by companies or other entities from banks and other lenders and a significant portion of such floating-rate loans may be rated below investment grade or unrated Floating-rate loans held by the Fund may be senior or subordinate obligations of the borrower and may or may not be secured by collateral First lien senior secured floating-rate loans are referred to herein as ldquosenior loansrdquo Floating-rate loans that are not senior loans (ie unsecured floating-rate loans and secured floating-rate loans that are not first lien floating-rate loans) are referred to herein as ldquojunior loansrdquo The Fund will generally invest in floating-rate loans that the Adviser deems to be liquid with readily available prices notwithstanding the foregoing the Fund may invest in floating-rate loans that are deemed illiquid so long as the Fund complies with the 15 limitation on investments of its net assets in illiquid assets described below under ldquoInvestment Restrictionsrdquo
16 The Fund currently anticipates investing only in registered open-end investment companies that are listed and traded in the US on registered exchanges (ie other ETFs) An ETF is an investment company registered under the 1940 Act that holds a portfolio of securities Many ETFs are designed to track the performance of a securities index including industry sector country and region indexes The Fund may invest in the securities of ETFs in excess of the limits imposed under the 1940 Act pursuant to exemptive orders obtained by other ETFs and their sponsors from the Commission In addition the Fund may invest in the securities of certain investment companies in excess of the limits imposed under the 1940 Act pursuant to an exemptive order obtained by the Trust and the Adviser from the Commission See Investment Company Act Release No 30377 (February 5 2013) (File No 812-13895) The ETFs in which the Fund may invest include Index Fund Shares (as described in Nasdaq Rule 5705) Portfolio Depository Receipts (as described in Nasdaq Rule 5705) and Managed Fund Shares (as described in Nasdaq Rule 5735) While the Fund may invest in inverse ETFs the Fund will not invest in leveraged or inverse leveraged (eg 2X or -3X) ETFs
SR-NASDAQ-2015-011 Amendment No 2 Page 40 of 64
At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade To be considered
ldquoinvestment graderdquo under normal market conditions rated Floating Rate Debt
Instruments will carry at the time of purchase a rating in the highest four rating
categories of at least one nationally recognized statistical ratings organization
(ldquoNRSROrdquo) (eg BBB- or higher by Standard amp Poorrsquos Ratings Services (ldquoSampPrdquo)
andor Fitch Ratings (ldquoFitchrdquo) or Baa3 or higher by Moodyrsquos Investors Service Inc
(ldquoMoodyrsquosrdquo)18 For unrated securities to be considered ldquoinvestment graderdquo under normal
market conditions such securities will be determined at the time of purchase to be of
comparable quality19 by the Adviser The Fund may invest up to 35 of its net assets in
securities that are at the time of investment rated below investment grade by each
NRSRO rating such securities (or securities that are unrated and determined by the
17 The liquidity of a security especially in the case of asset-backed and mortgage-backed securities will be a substantial factor in the Fundrsquos security selection process Consistent with the discussion below under ldquoInvestment Restrictionsrdquo the Fund will not purchase any Floating Rate Debt Instruments (including asset-backed securities and mortgage-backed securities) that in the Adviserrsquos opinion are illiquid if as a result more than 15 of the value of the Fundrsquos net assets will be invested in illiquid assets
18 For the avoidance of doubt if a security is rated by multiple NRSROs and receives different ratings the Fund will treat the security as being rated in the highest rating category received from an NRSRO
19 Comparable quality of unrated securities will be determined by the Adviser based on fundamental credit analysis of the unrated security and comparable NRSRO-rated securities On a best efforts basis the Adviser will attempt to make a rating determination based on publicly available data In making a ldquocomparable qualityrdquo determination the Adviser may consider for example whether the issuer of the security has issued other rated securities the nature and provisions of the relevant security whether the obligations under the relevant security are guaranteed by another entity and the rating of such guarantor (if any) relevant cash flows macroeconomic analysis andor sector or industry analysis
SR-NASDAQ-2015-011 Amendment No 2 Page 41 of 64
Adviser to be of comparable quality) commonly referred to as ldquohigh yieldrdquo or ldquojunkrdquo
bonds If subsequent to purchase by the Fund a security held by the Fund experiences a
decline in credit quality and falls below investment grade the Fund may continue to hold
the security and it will not cause the Fund to violate the 35 investment limitation
however the security will be taken into account for purposes of determining whether
purchases of additional securities will cause the Fund to violate such limitation
The Fund will limit its investments in asset-backed securities (excluding agency
mortgage-backed securities) and non-agency mortgage-backed securities (in the
aggregate) to 20 of its net assets20 In addition the Fund will limit its investments in
junior loans to 20 of its net assets
The Fund will hold debt securities (including in the aggregate Floating Rate
Debt Instruments and the fixed-rate debt securities described below) of at least 13
non-affiliated issuers
Other Investments
Under normal market conditions the Fund will invest primarily in the Floating
Rate Debt Instruments described above to meet its investment objective In addition the
Fund may invest up to 20 of its net assets in the following types of fixed-rate debt
securities corporate21 and government bonds and notes agency securities22 instruments
20 For the avoidance of doubt there is no limitation on the Fundrsquos investments in agency mortgage-backed securities
21 See footnote 10 above
22 See footnote 11 above
SR-NASDAQ-2015-011 Amendment No 2 Page 42 of 64
of non-US issuers in developed markets privately-issued securities 23 asset-backed
securities 24 mortgage-backed securities 25 municipal bonds money market securities26
and investment companies27 (including investment companies advised by the Adviser)
that invest primarily in the foregoing types of debt securities
Further to pursue its investment objective the Fund may invest up to 20 of the
value of its net assets in exchange-listed options on US Treasury futures contracts and
exchange-listed US Treasury futures contracts28 The use of these derivative
transactions may allow the Fund to obtain net long or short exposures to selected interest
rates These derivatives may also be used to hedge risks including interest rate risks and
credit risks associated with the Fundrsquos portfolio investments The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
23 See footnote 12 above
24 See footnote 13 above
25 See footnote 14 above
26 ldquoMoney market securitiesrdquo for these purposes generally includes short-term high-quality obligations issued or guaranteed by the US Treasury or the agencies or instrumentalities of the US government short-term high-quality securities issued or guaranteed by non-US governments agencies and instrumentalities repurchase agreements commercial paper (both asset-backed and non-assetshybacked) and deposits and other obligations of US and non-US banks and financial institutions
27 See footnote 16 above
28 At least 90 of the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be invested in instruments that trade in markets that are members of the Intermarket Surveillance Group (ldquoISGrdquo) (see footnote 40 below) or are parties to a comprehensive surveillance sharing agreement with the Exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 43 of 64
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index
Investment Restrictions
The Fund will not invest 25 or more of the value of its total assets in securities
of issuers in any one industry This restriction does not apply to (a) obligations issued or
guaranteed by the US government its agencies or instrumentalities or (b) securities of
other investment companies29
The Fund may hold up to an aggregate amount of 15 of its net assets in illiquid
assets (calculated at the time of investment) including Rule 144A securities deemed
illiquid by the Adviser30 The Fund will monitor its portfolio liquidity on an ongoing
basis to determine whether in light of current circumstances an adequate level of
liquidity is being maintained and will consider taking appropriate steps in order to
maintain adequate liquidity if through a change in values net assets or other
circumstances more than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid
assets include securities subject to contractual or other restrictions on resale and other
29 See Form N-1A Item 9 The Commission has taken the position that a fund is concentrated if it invests more than 25 of the value of its total assets in any one industry See eg Investment Company Act Release No 9011 (October 30 1975) 40 FR 54241 (November 21 1975)
30 In reaching liquidity decisions the Adviser may consider the following factors the frequency of trades and quotes for the security the number of dealers wishing to purchase or sell the security and the number of other potential purchasers dealer undertakings to make a market in the security and the nature of the security and the nature of the marketplace in which it trades (eg the time needed to dispose of the security the method of soliciting offers and the mechanics of transfer)
SR-NASDAQ-2015-011 Amendment No 2 Page 44 of 64
instruments that lack readily available markets as determined in accordance with
Commission staff guidance31
The Fund will not invest in non-US equity securities
Creation and Redemption of Shares
The Fund will issue and redeem Shares on a continuous basis at net asset value
(ldquoNAVrdquo)32 only in large blocks of Shares (ldquoCreation Unitsrdquo) in transactions with
authorized participants generally including broker-dealers and large institutional
investors (ldquoAuthorized Participantsrdquo) Creation Units generally will consist of 50000
Shares although this may change from time to time Creation Units however are not
expected to consist of less than 50000 Shares As described in the Registration
Statement and consistent with the Exemptive Relief the Fund will issue and redeem
Creation Units in exchange for an in-kind portfolio of instruments andor cash in lieu of
31 The Commission has stated that long-standing Commission guidelines have required open-end funds to hold no more than 15 of their net assets in illiquid securities and other illiquid assets See Investment Company Act Release No 28193 (March 11 2008) 73 FR 14618 (March 18 2008) footnote 34 See also Investment Company Act Release No 5847 (October 21 1969) 35 FR 19989 (December 31 1970) (Statement Regarding ldquoRestricted Securitiesrdquo) Investment Company Act Release No 18612 (March 12 1992) 57 FR 9828 (March 20 1992) (Revisions of Guidelines to Form N-1A) A fundrsquos portfolio security is illiquid if it cannot be disposed of in the ordinary course of business within seven days at approximately the value ascribed to it by the fund See Investment Company Act Release No 14983 (March 12 1986) 51 FR 9773 (March 21 1986) (adopting amendments to Rule 2a-7 under the 1940 Act) Investment Company Act Release No 17452 (April 23 1990) 55 FR 17933 (April 30 1990) (adopting Rule 144A under the Securities Act of 1933)
32 The NAV of the Fundrsquos Shares generally will be calculated once daily Monday through Friday as of the close of regular trading on the New York Stock Exchange generally 400 pm Eastern Time (the ldquoNAV Calculation Timerdquo) NAV per Share will be calculated by dividing the Fundrsquos net assets by the number of Fund Shares outstanding For more information regarding the valuation of Fund investments in calculating the Fundrsquos NAV see the Registration Statement
SR-NASDAQ-2015-011 Amendment No 2 Page 45 of 64
such instruments (the ldquoCreation Basketrdquo) In addition if there is a difference between the
NAV attributable to a Creation Unit and the market value of the Creation Basket
exchanged for the Creation Unit the party conveying instruments with the lower value
will pay to the other an amount in cash equal to the difference (referred to as the ldquoCash
Componentrdquo)
Creations and redemptions must be made by or through an Authorized Participant
that has executed an agreement that has been agreed to by the Distributor and BNY with
respect to creations and redemptions of Creation Units All standard orders to create
Creation Units must be received by the transfer agent no later than the closing time of the
regular trading session on the New York Stock Exchange (ordinarily 400 pm Eastern
Time) (the ldquoClosing Timerdquo) in each case on the date such order is placed in order for the
creation of Creation Units to be effected based on the NAV of Shares as next determined
on such date after receipt of the order in proper form Shares may be redeemed only in
Creation Units at their NAV next determined after receipt not later than the Closing Time
of a redemption request in proper form by the Fund through the transfer agent and only
on a business day
The Fundrsquos custodian through the National Securities Clearing Corporation will
make available on each business day prior to the opening of business of the Exchange
the list of the names and quantities of the instruments comprising the Creation Basket as
well as the estimated Cash Component (if any) for that day The published Creation
Basket will apply until a new Creation Basket is announced on the following business
day prior to commencement of trading in the Shares
SR-NASDAQ-2015-011 Amendment No 2 Page 46 of 64
Net Asset Value
The Fundrsquos NAV will be determined as of the close of trading (normally
400 pm Eastern Time) on each day the New York Stock Exchange is open for
business NAV will be calculated for the Fund by taking the market price of the Fundrsquos
total assets including interest or dividends accrued but not yet collected less all
liabilities and dividing such amount by the total number of Shares outstanding The
result rounded to the nearest cent will be the NAV per Share All valuations will be
subject to review by the Board of Trustees of the Trust (ldquoTrust Boardrdquo) or its delegate
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with valuation procedures (which may be revised from time to time) adopted by the Trust
Board (the ldquoValuation Proceduresrdquo) and in accordance with the 1940 Act A market
valuation generally means a valuation (i) obtained from an exchange an independent
pricing service (ldquoPricing Servicerdquo) or a major market maker (or dealer) or (ii) based on a
price quotation or other equivalent indication of value supplied by an exchange a Pricing
Service or a major market maker (or dealer) The information summarized below is
based on the Valuation Procedures as currently in effect however as noted above the
Valuation Procedures are amended from time to time and therefore such information is
subject to change
Certain securities including Floating Rate Debt Instruments in which the Fund
may invest will not be listed on any securities exchange or board of trade Such
securities will typically be bought and sold by institutional investors in individually
negotiated private transactions that function in many respects like an over-the-counter
SR-NASDAQ-2015-011 Amendment No 2 Page 47 of 64
secondary market although typically no formal market makers will exist Certain
securities particularly debt securities will have few or no trades or trade infrequently
and information regarding a specific security may not be widely available or may be
incomplete Accordingly determinations of the fair value of debt securities may be
based on infrequent and dated information Because there is less reliable objective data
available elements of judgment may play a greater role in valuation of debt securities
than for other types of securities Typically Floating Rate Debt Instruments and other
debt securities in which the Fund may invest (other than those described below) will be
valued using information provided by a Pricing Service Debt securities having a
remaining maturity of 60 days or less when purchased will be valued at cost adjusted for
amortization of premiums and accretion of discounts provided the Adviserrsquos pricing
committee (the ldquoPricing Committeerdquo) has determined that the use of amortized cost is an
appropriate reflection of fair value given market and issuer-specific conditions existing at
the time of the determination Overnight repurchase agreements will be valued at cost
and term repurchase agreements (ie those whose maturity exceeds seven days) will be
valued at the average of the bid quotations obtained daily from at least two recognized
dealers
Asset-backed and mortgage-backed securities will generally be valued by using a
Pricing Service If a Pricing Service does not cover a particular asset-backed or
mortgage-backed security or discontinues covering a particular asset-backed or
mortgage-backed security the security will be priced using broker quotes generally
provided by brokers that make or participate in markets in the security To derive values
Pricing Services and broker-dealers may use matrix pricing and valuation models as well
SR-NASDAQ-2015-011 Amendment No 2 Page 48 of 64
as recent market transactions for the same or similar assets As it deems appropriate the
Pricing Committee may determine that a Pricing Service price does not represent an
accurate value of an asset-backed or mortgage-backed security based on broker quotes it
receives a recent trade in the security by the Fund information from a portfolio manager
or other market information In the event that the Pricing Committee determines that the
Pricing Service price is unreliable or inaccurate based on such other information broker
quotes may be used Additionally if the Pricing Committee determines that the price of
an asset-backed or mortgage-backed security obtained from a Pricing Service and
available broker quotes is unreliable or inaccurate due to market conditions or other
reasons or if a Pricing Service price or broker quote is unavailable the security will be
valued using fair value pricing as described below
Equity securities listed on any exchange other than the Exchange will be valued at
the last sale price on the exchange on which they are principally traded on the business
day as of which such value is being determined Equity securities listed on the Exchange
will be valued at the official closing price on the business day as of which such value is
being determined If there has been no sale on such day or no official closing price in
the case of securities traded on the Exchange the securities will be valued using fair
value pricing as described below Equity securities traded on more than one securities
exchange will be valued at the last sale price or official closing price as applicable on
the business day as of which such value is being determined at the close of the exchange
representing the principal market for such securities
Exchange-traded options and futures contracts will be valued at the closing price
in the market where such contracts are principally traded
SR-NASDAQ-2015-011 Amendment No 2 Page 49 of 64
Certain securities including Floating Rate Debt Instruments in which the Fund
will invest will not be able to be priced by pre-established pricing methods Such
securities may be valued by the Trust Board or its delegate at fair value The use of fair
value pricing by the Fund will be governed by the Valuation Procedures and conducted in
accordance with the provisions of the 1940 Act Valuing the Fundrsquos securities using fair
value pricing will result in using prices for those securities that may differ from current
market valuations or official closing prices on the applicable exchange
Availability of Information
The Fundrsquos website (wwwftportfolioscom) which will be publicly available
prior to the public offering of Shares will include a form of the prospectus for the Fund
that may be downloaded The website will include the Sharesrsquo ticker CUSIP and
exchange information along with additional quantitative information updated on a daily
basis including for the Fund (1) daily trading volume the prior business dayrsquos reported
NAV and closing price mid-point of the bidask spread at the time of calculation of such
NAV (the ldquoBidAsk Pricerdquo)33 and a calculation of the premium and discount of the
BidAsk Price against the NAV and (2) data in chart format displaying the frequency
distribution of discounts and premiums of the daily BidAsk Price against the NAV
within appropriate ranges for each of the four previous calendar quarters On each
business day before commencement of trading in Shares in the Regular Market Session34
33 The BidAsk Price of the Fund will be determined using the mid-point of the highest bid and the lowest offer on the Exchange as of the time of calculation of the Fundrsquos NAV The records relating to BidAsk Prices will be retained by the Fund and its service providers
34 See Nasdaq Rule 4120(b)(4) (describing the three trading sessions on the Exchange (1) Pre-Market Session from 4 am to 930 am Eastern Time (2)
SR-NASDAQ-2015-011 Amendment No 2 Page 50 of 64
on the Exchange the Fund will disclose on its website the identities and quantities of the
portfolio of securities and other assets (the ldquoDisclosed Portfoliordquo as defined in Nasdaq
Rule 5735(c)(2)) held by the Fund that will form the basis for the Fundrsquos calculation of
NAV at the end of the business day 35 The Fundrsquos disclosure of derivative positions in
the Disclosed Portfolio will include information that market participants can use to value
these positions intraday On a daily basis the Fund will disclose on the Fundrsquos website
the following information regarding each portfolio holding as applicable to the type of
holding ticker symbol CUSIP number or other identifier if any a description of the
holding (including the type of holding) the identity of the security or other asset or
instrument underlying the holding if any for options the option strike price quantity
held (as measured by for example par value notional value or number of shares
contracts or units) maturity date if any coupon rate if any effective date if any market
value of the holding and percentage weighting of the holding in the Fundrsquos portfolio
The website information will be publicly available at no charge
In addition for the Fund an estimated value defined in Rule 5735(c)(3) as the
ldquoIntraday Indicative Valuerdquo that reflects an estimated intraday value of the Fundrsquos
Disclosed Portfolio will be disseminated Moreover the Intraday Indicative Value
Regular Market Session from 930 am to 4 pm or 415 pm Eastern Time and (3) Post-Market Session from 4 pm or 415 pm to 8 pm Eastern Time)
Under accounting procedures to be followed by the Fund trades made on the prior business day (ldquoTrdquo) will be booked and reflected in NAV on the current business day (ldquoT+1rdquo) Accordingly the Fund will be able to disclose at the beginning of the business day the portfolio that will form the basis for the NAV calculation at the end of the business day
35
SR-NASDAQ-2015-011 Amendment No 2 Page 51 of 64
available on the NASDAQ OMX Information LLC proprietary index data service36 will
be based upon the current value for the components of the Disclosed Portfolio and will be
updated and widely disseminated by one or more major market data vendors and broadly
displayed at least every 15 seconds during the Regular Market Session The Intraday
Indicative Value will be based on quotes and closing prices from the securitiesrsquo local
market and may not reflect events that occur subsequent to the local marketrsquos close
Premiums and discounts between the Intraday Indicative Value and the market price may
occur This should not be viewed as a ldquoreal timerdquo update of the NAV per Share of the
Fund which is calculated only once a day
The dissemination of the Intraday Indicative Value together with the Disclosed
Portfolio will allow investors to determine the value of the underlying portfolio of the
Fund on a daily basis and will provide a close estimate of that value throughout the
trading day
Investors will also be able to obtain the Fundrsquos Statement of Additional
Information (ldquoSAIrdquo) the Fundrsquos annual and semi-annual reports (together ldquoShareholder
Reportsrdquo) and its Form N-CSR and Form N-SAR filed twice a year The Fundrsquos SAI
and Shareholder Reports will be available free upon request from the Fund and those
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or
downloaded from the Commissionrsquos website at wwwsecgov Information regarding
Currently the NASDAQ OMX Global Index Data Service (ldquoGIDSrdquo) is the NASDAQ OMX global index data feed service offering real-time updates daily summary messages and access to widely followed indexes and Intraday Indicative Values for ETFs GIDS provides investment professionals with the daily information needed to track or trade NASDAQ OMX indexes listed ETFs or third-party partner indexes and ETFs
36
SR-NASDAQ-2015-011 Amendment No 2 Page 52 of 64
market price and trading volume of the Shares will be continually available on a real-time
basis throughout the day on brokersrsquo computer screens and other electronic services
Information regarding the previous dayrsquos closing price and trading volume information
for the Shares will be published daily in the financial section of newspapers Quotation
and last sale information for the Shares will be available via Nasdaq proprietary quote
and trade services as well as in accordance with the Unlisted Trading Privileges and the
Consolidated Tape Association (ldquoCTArdquo) plans for the Shares Quotation and last sale
information for the other ETFs in which the Fund will invest will be available via the
quote and trade services of their respective primary exchanges as well as in accordance
with the Unlisted Trading Privileges and the CTA plans as applicable Quotation and
last sale information for US exchange-traded options will be available via the Options
Price Reporting Authority Intraday executable price quotations on Floating Rate Debt
Instruments and other assets not traded on an exchange will be available from major
broker-dealer firms or market data vendors as well as from automated quotation systems
published or other public sources or online information services Additionally the Trade
Reporting and Compliance Engine (ldquoTRACErdquo) of the Financial Industry Regulatory
Authority (ldquoFINRArdquo) will be a source of price information for corporate bonds
privately-issued securities mortgage-backed securities and asset-backed securities to the
extent transactions in such securities are reported to TRACE37 For exchange-traded
Broker-dealers that are FINRA member firms have an obligation to report transactions in specified debt securities to TRACE to the extent required under applicable FINRA rules Generally such debt securities will have at issuance a maturity that exceeds one calendar year
37
SR-NASDAQ-2015-011 Amendment No 2 Page 53 of 64
assets intraday pricing information will be available directly from the applicable listing
exchange
Additional information regarding the Fund and the Shares including investment
strategies risks creation and redemption procedures fees Fund holdings disclosure
policies distributions and taxes will be included in the Registration Statement
Initial and Continued Listing
The Shares will be subject to Rule 5735 which sets forth the initial and continued
listing criteria applicable to Managed Fund Shares The Exchange represents that for
initial andor continued listing the Fund must be in compliance with Rule 10A-338 under
the Act A minimum of 100000 Shares will be outstanding at the commencement of
trading on the Exchange The Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the NAV and the
Disclosed Portfolio will be made available to all market participants at the same time
Trading Halts
With respect to trading halts the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading in the Shares of the Fund Nasdaq will
halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12) Trading may be
halted because of market conditions or for reasons that in the view of the Exchange
make trading in the Shares inadvisable These may include (1) the extent to which
trading is not occurring in the securities andor the other assets constituting the Disclosed
Portfolio of the Fund or (2) whether other unusual conditions or circumstances
See 17 CFR 24010A-3 38
SR-NASDAQ-2015-011 Amendment No 2 Page 54 of 64
detrimental to the maintenance of a fair and orderly market are present Trading in the
Shares also will be subject to Rule 5735(d)(2)(D) which sets forth circumstances under
which Shares of the Fund may be halted
Trading Rules
Nasdaq deems the Shares to be equity securities thus rendering trading in the
Shares subject to Nasdaqrsquos existing rules governing the trading of equity securities
Nasdaq will allow trading in the Shares from 400 am until 800 pm Eastern Time
The Exchange has appropriate rules to facilitate transactions in the Shares during all
trading sessions As provided in Nasdaq Rule 5735(b)(3) the minimum price variation
for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $001
Surveillance
The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws39 The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities laws
The surveillances referred to above generally focus on detecting securities trading
outside their normal patterns which could be indicative of manipulative or other violative
activity When such situations are detected surveillance analysis follows and
FINRA surveils trading on the Exchange pursuant to a regulatory services agreement The Exchange is responsible for FINRArsquos performance under this regulatory services agreement
39
SR-NASDAQ-2015-011 Amendment No 2 Page 55 of 64
investigations are opened where appropriate to review the behavior of all relevant
parties for all relevant trading violations
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 56 of 64
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
SR-NASDAQ-2015-011 Amendment No 2 Page 57 of 64
2 Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
SR-NASDAQ-2015-011 Amendment No 2 Page 58 of 64
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
SR-NASDAQ-2015-011 Amendment No 2 Page 59 of 64
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
SR-NASDAQ-2015-011 Amendment No 2 Page 60 of 64
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 61 of 64
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
SR-NASDAQ-2015-011 Amendment No 2 Page 62 of 64
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
B Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
C Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received From Members Participants or Others
Written comments were neither solicited nor received
III Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Within 45 days of the date of publication of this notice in the Federal Register or
within such longer period (i) as the Commission may designate up to 90 days of such date
if it finds such longer period to be appropriate and publishes its reasons for so finding or
(ii) as to which the Exchange consents the Commission shall (a) by order approve or
disapprove such proposed rule change or (b) institute proceedings to determine whether
the proposed rule change should be disapproved
SR-NASDAQ-2015-011 Amendment No 2 Page 63 of 64
IV Solicitation of Comments
Interested persons are invited to submit written data views and arguments
concerning the foregoing including whether the proposed rule change is consistent with
the Act Comments may be submitted by any of the following methods
Electronic comments
bull Use the Commissionrsquos Internet comment form
(httpwwwsecgovrulessroshtml) or
bull Send an e-mail to rule-commentssecgov Please include File Number
SR-NASDAQ-2015-011 on the subject line
Paper comments
bull Send paper comments in triplicate to Brent J Fields Secretary Securities and
Exchange Commission Station Place 100 F Street NE Washington DC
20549-9303
All submissions should refer to File Number SR-NASDAQ-2015-011 This file number
should be included on the subject line if e-mail is used To help the Commission process
and review your comments more efficiently please use only one method The
Commission will post all comments on the Commissionrsquos Internet website
httpwwwsecgovrulessroshtml
Copies of the submission all subsequent amendments all written statements with
respect to the proposed rule change that are filed with the Commission and all written
communications relating to the proposed rule change between the Commission and any
person other than those that may be withheld from the public in accordance with the
provisions of 5 USC 552 will be available for website viewing and printing in the
Commissionrsquos Public Reference Room 100 F Street NE Washington DC 20549 on
SR-NASDAQ-2015-011 Amendment No 2 Page 64 of 64
official business days between the hours of 1000 am and 300 pm Copies of the filing
also will be available for inspection and copying at the principal office of Nasdaq All
comments received will be posted without change the Commission does not edit
personal identifying information from submissions You should submit only information
that you wish to make available publicly
All submissions should refer to File Number SR-NASDAQ-2015-011 and should
be submitted on or before [insert date 21 days from publication in the Federal Register]
For the Commission by the Division of Trading and Markets pursuant to
delegated authority41
Kevin M OrsquoNeill Deputy Secretary
17 CFR 20030-3(a)(12) 41
SR-NASDAQ-2015-011 Amendment No 2 Page 27 of 64
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
SR-NASDAQ-2015-011 Amendment No 2 Page 28 of 64
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
SR-NASDAQ-2015-011 Amendment No 2 Page 29 of 64
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
SR-NASDAQ-2015-011 Amendment No 2 Page 30 of 64
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
SR-NASDAQ-2015-011 Amendment No 2 Page 31 of 64
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
4 Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
5 Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received from Members Participants or Others
Written comments were neither solicited nor received
6 Extension of Time Period for Commission Action
The Exchange does not consent at this time to an extension of any time period for
Commission action
7 Basis for Summary Effectiveness Pursuant to Section 19(b)(3) or for Accelerated Effectiveness Pursuant to Section 19(b)(2)
Not applicable
8 Proposed Rule Change Based on Rules of Another Self-Regulatory Organization or of the Commission
Not applicable
9 Security-Based Swap Submissions Filed Pursuant to Section 3C of the Act
Not applicable
SR-NASDAQ-2015-011 Amendment No 2 Page 32 of 64
10 Advance Notices Filed Pursuant to Section 806(e) of the Payment Clearing and Settlement Supervision Act
Not applicable
11 Exhibits
1 Completed notice of proposed rule change for publication in the Federal
Register
SR-NASDAQ-2015-011 Amendment No 2 Page 33 of 64
EXHIBIT 1
SECURITIES AND EXCHANGE COMMISSION (Release No 34shy File No SR-NASDAQ-2015-011)
April __ 2015
Self-Regulatory Organizations The NASDAQ Stock Market LLC Notice of Filing of Proposed Rule Change Relating to the Listing and Trading of the Shares of the First Trust Strategic Floating Rate ETF of First Trust Exchange-Traded Fund IV
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (ldquoActrdquo)1 and
Rule 19b-4 thereunder2 notice is hereby given that on February 12 2015 The NASDAQ
Stock Market LLC (ldquoNasdaqrdquo or the ldquoExchangerdquo) filed with the Securities and Exchange
Commission (ldquoCommissionrdquo) the proposed rule change as described in in Items I II and
III below which Items have been prepared by Nasdaq On April 6 2015 Nasdaq filed
Amendment No 1 which replaced the text of the original filing in its entirety On April
15 2015 Nasdaq filed Amendment No 2 which replaced the text of the original filing in
its entirety The Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons
I Self-Regulatory Organizationrsquos Statement of the Terms of Substance of the Proposed Rule Change
Nasdaq proposes to list and trade the shares of the First Trust Strategic Floating
Rate ETF (the ldquoFundrdquo) of the First Trust Strategic Floating Rate ETF (the ldquoFundrdquo) of
First Trust Exchange-Traded Fund IV (the ldquoTrustrdquo) under Nasdaq Rule 5735 (ldquoManaged
1 15 USC 78s(b)(1)
2 17 CFR 24019b-4
SR-NASDAQ-2015-011 Amendment No 2 Page 34 of 64
Fund Sharesrdquo)3 The shares of the Fund are collectively referred to herein as the
ldquoSharesrdquo
The text of the proposed rule change is available at
httpnasdaqcchwallstreetcom at Nasdaqrsquos principal office and at the Commissionrsquos
Public Reference Room
II Self-Regulatory Organizationrsquos Statement of the Purpose of and Statutory Basis for the Proposed Rule Change
In its filing with the Commission Nasdaq included statements concerning the
purpose of and basis for the proposed rule change The text of these statements may be
examined at the places specified in Item IV below Nasdaq has prepared summaries set
forth in Sections A B and C below of the most significant aspects of such statements
A Self-Regulatory Organizationrsquos Statement of the Purpose of and Statutory Basis for the Proposed Rule Change
1 Purpose
The Exchange proposes to list and trade the Shares of the Fund under Nasdaq
Rule 5735 which governs the listing and trading of Managed Fund Shares4 on the
3 The Commission approved Nasdaq Rule 5735 in Securities Exchange Act Release No 57962 (June 13 2008) 73 FR 35175 (June 20 2008) (SR-NASDAQ-2008shy039) There are already multiple actively-managed funds listed on the Exchange see eg Securities Exchange Act Release Nos 69464 (April 26 2013) 78 FR 25774 (May 2 2013) (SR-NASDAQ-2013-036) (order approving listing and trading of First Trust Senior Loan Fund) 68972 (February 22 2013) 78 FR 13721 (February 28 2013) (SR-NASDAQ-2012-147) (order approving listing and trading of First Trust High Yield LongShort ETF) 66489 (February 29 2012) 77 FR 13379 (March 6 2012) (SR-NASDAQ-2012-004) (order approving listing and trading of WisdomTree Emerging Markets Corporate Bond Fund) The Exchange believes the proposed rule change raises no significant issues not previously addressed in those prior Commission orders
4 A Managed Fund Share is a security that represents an interest in an investment company registered under the Investment Company Act of 1940 (15 USC 80ashy
SR-NASDAQ-2015-011 Amendment No 2 Page 35 of 64
Exchange The Fund will be an actively-managed exchange-traded fund (ldquoETFrdquo) The
Shares will be offered by the Trust which was established as a Massachusetts business
trust on September 15 20105 The Trust is registered with the Commission as an
investment company and has filed a registration statement on Form N-1A (ldquoRegistration
Statementrdquo) with the Commission6 The Fund will be a series of the Trust The Fund
intends to qualify each year as a regulated investment company (ldquoRICrdquo) under
Subchapter M of the Internal Revenue Code of 1986 as amended
First Trust Advisors LP will be the investment adviser (ldquoAdviserrdquo) to the Fund
First Trust Portfolios LP (the ldquoDistributorrdquo) will be the principal underwriter and
distributor of the Fundrsquos Shares The Bank of New York Mellon Corporation (ldquoBNYrdquo)
will act as the administrator accounting agent custodian and transfer agent to the Fund
1) (the ldquo1940 Actrdquo) organized as an open-end investment company or similar entity that invests in a portfolio of securities selected by its investment adviser consistent with its investment objectives and policies In contrast an open-end investment company that issues Index Fund Shares listed and traded on the Exchange under Nasdaq Rule 5705 seeks to provide investment results that correspond generally to the price and yield performance of a specific foreign or domestic stock index fixed income securities index or combination thereof
5 The Commission has issued an order upon which the Trust may rely granting certain exemptive relief under the 1940 Act See Investment Company Act Release No 30029 (April 10 2012) (File No 812-13795) (the ldquoExemptive Reliefrdquo) In addition the Commission has issued no-action relief upon which the Trust may rely pertaining to the Fundrsquos ability to invest in derivatives notwithstanding certain representations in the application for the Exemptive Relief See Commission No-Action Letter (December 6 2012)
6 See Post-Effective Amendment No 104 to Registration Statement on Form N-1A for the Trust dated January 29 2015 (File Nos 333-174332 and 811-22559) The descriptions of the Fund and the Shares contained herein are based in part on information in the Registration Statement
7
SR-NASDAQ-2015-011 Amendment No 2 Page 36 of 64
Paragraph (g) of Rule 5735 provides that if the investment adviser to the
investment company issuing Managed Fund Shares is affiliated with a broker-dealer
such investment adviser shall erect a ldquofire wallrdquo between the investment adviser and the
broker-dealer with respect to access to information concerning the composition andor
changes to such investment company portfolio7 In addition paragraph (g) further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio Rule 5735(g) is similar
to Nasdaq Rule 5705(b)(5)(A)(i) however paragraph (g) in connection with the
establishment of a ldquofire wallrdquo between the investment adviser and the broker-dealer
reflects the applicable open-end fundrsquos portfolio not an underlying benchmark index as
is the case with index-based funds The Adviser is not a broker-dealer although it is
affiliated with the Distributor a broker-dealer The Adviser has implemented a fire wall
An investment adviser to an open-end fund is required to be registered under the Investment Advisers Act of 1940 (the ldquoAdvisers Actrdquo) As a result the Adviser and its related personnel are subject to the provisions of Rule 204A-1 under the Advisers Act relating to codes of ethics This Rule requires investment advisers to adopt a code of ethics that reflects the fiduciary nature of the relationship to clients as well as compliance with other applicable securities laws Accordingly procedures designed to prevent the communication and misuse of non-public information by an investment adviser must be consistent with Rule 204A-1 under the Advisers Act In addition Rule 206(4)-7 under the Advisers Act makes it unlawful for an investment adviser to provide investment advice to clients unless such investment adviser has (i) adopted and implemented written policies and procedures reasonably designed to prevent violation by the investment adviser and its supervised persons of the Advisers Act and the Commission rules adopted thereunder (ii) implemented at a minimum an annual review regarding the adequacy of the policies and procedures established pursuant to subparagraph (i) above and the effectiveness of their implementation and (iii) designated an individual (who is a supervised person) responsible for administering the policies and procedures adopted under subparagraph (i) above
8
SR-NASDAQ-2015-011 Amendment No 2 Page 37 of 64
with respect to its broker-dealer affiliate regarding access to information concerning the
composition andor changes to the portfolio In addition personnel who make decisions
on the Fundrsquos portfolio composition will be subject to procedures designed to prevent the
use and dissemination of material non-public information regarding the Fundrsquos portfolio
In the event (a) the Adviser becomes or becomes newly affiliated with a broker-dealer
or (b) any new adviser or sub-adviser is a registered broker-dealer or becomes affiliated
with another broker-dealer it will implement a fire wall with respect to its relevant
personnel andor such broker-dealer affiliate as applicable regarding access to
information concerning the composition andor changes to the portfolio and will be
subject to procedures designed to prevent the use and dissemination of material
non-public information regarding such portfolio The Fund does not currently intend to
use a sub-adviser
First Trust Strategic Floating Rate ETF
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions8 at least 80 of its
The term ldquounder normal market conditionsrdquo as used herein includes but is not limited to the absence of adverse market economic political or other conditions including extreme volatility or trading halts in the fixed income markets or the financial markets generally operational issues causing dissemination of inaccurate market information or force majeure type events such as systems failure natural or man-made disaster act of God armed conflict act of terrorism riot or labor disruption or any similar intervening circumstance For temporary defensive purposes during the initial invest-up period and during periods of high cash inflows or outflows the Fund may depart from its principal investment strategies for example it may hold a higher than normal proportion of its assets in cash During such periods the Fund may not be able to achieve its investment objective The Fund may adopt a defensive strategy when the Adviser believes securities in which the Fund normally invests have elevated risks due to political or economic factors and in other extraordinary circumstances
SR-NASDAQ-2015-011 Amendment No 2 Page 38 of 64
net assets in a portfolio of the following types of floating-rate9 debt instruments issued by
US and non-US public- and private-sector entities floating-rate corporate10 and
government bonds and notes floating-rate agency securities 11 floating-rate instruments
of non-US issuers floating-rate privately-issued securities 12 floating-rate asset-backed
securities 13 floating-rate mortgage-backed securities14 floating-rate loans 15 and
9 For the avoidance of doubt the term ldquofloating-raterdquo shall also include similar terms such as ldquovariable-raterdquo and ldquoadjustable-raterdquo
10 The Adviser expects that under normal market conditions generally for a corporate bond to be considered as an eligible investment after taking into account such an investment at least 75 of the Fundrsquos net assets that are invested in floating-rate corporate bonds and as described below fixed-rate corporate bonds (in the aggregate) will be comprised of corporate bonds that have at the time of original issuance $100 million or more par amount outstanding
11 ldquoAgency securitiesrdquo for these purposes generally includes securities issued by the following entities Government National Mortgage Association (Ginnie Mae) Federal National Mortgage Association (Fannie Mae) Federal Home Loan Banks (FHLBanks) Federal Home Loan Mortgage Corporation (Freddie Mac) Farm Credit System (FCS) Farm Credit Banks (FCBanks) Student Loan Marketing Association (Sallie Mae) Resolution Funding Corporation (REFCORP) Financing Corporation (FICO) and the Farm Credit System (FCS) Financial Assistance Corporation (FAC) Agency securities can include but are not limited to mortgage-backed securities
12 ldquoPrivately-issued securitiesrdquo for these purposes generally includes Rule 144A securities other than mortgage-backed Rule 144A securities Under normal market conditions privately-issued securities will have at the time of original issuance $100 million or more principal amount outstanding to be considered eligible investments
13 Asset-backed securities are securities that are backed by a pool of assets The Fund currently intends to invest in asset-backed securities that are consumer asset-backed securities
14 Mortgage-backed securities which are securities that directly or indirectly represent a participation in or are secured by and payable from mortgage loans on real property will consist of (1) residential mortgage-backed securities (ldquoRMBSrdquo) (2) commercial mortgage-backed securities (ldquoCMBSrdquo) (3) stripped mortgage-backed securities (ldquoSMBSrdquo) which are mortgage-backed securities
SR-NASDAQ-2015-011 Amendment No 2 Page 39 of 64
investment companies16 (including investment companies advised by the Adviser) that
invest primarily in the foregoing types of debt instruments17 (collectively ldquoFloating Rate
Debt Instrumentsrdquo)
where mortgage payments are divided between paying the loanrsquos principal and paying the loanrsquos interest (4) collateralized mortgage obligations (ldquoCMOsrdquo) and real estate mortgage investment conduits (ldquoREMICsrdquo) which are mortgage-backed securities that are divided into multiple classes with each class being entitled to a different share of the principal and interest payments received from the pool of underlying assets
15 The floating-rate loans in which the Fund will invest will represent amounts borrowed by companies or other entities from banks and other lenders and a significant portion of such floating-rate loans may be rated below investment grade or unrated Floating-rate loans held by the Fund may be senior or subordinate obligations of the borrower and may or may not be secured by collateral First lien senior secured floating-rate loans are referred to herein as ldquosenior loansrdquo Floating-rate loans that are not senior loans (ie unsecured floating-rate loans and secured floating-rate loans that are not first lien floating-rate loans) are referred to herein as ldquojunior loansrdquo The Fund will generally invest in floating-rate loans that the Adviser deems to be liquid with readily available prices notwithstanding the foregoing the Fund may invest in floating-rate loans that are deemed illiquid so long as the Fund complies with the 15 limitation on investments of its net assets in illiquid assets described below under ldquoInvestment Restrictionsrdquo
16 The Fund currently anticipates investing only in registered open-end investment companies that are listed and traded in the US on registered exchanges (ie other ETFs) An ETF is an investment company registered under the 1940 Act that holds a portfolio of securities Many ETFs are designed to track the performance of a securities index including industry sector country and region indexes The Fund may invest in the securities of ETFs in excess of the limits imposed under the 1940 Act pursuant to exemptive orders obtained by other ETFs and their sponsors from the Commission In addition the Fund may invest in the securities of certain investment companies in excess of the limits imposed under the 1940 Act pursuant to an exemptive order obtained by the Trust and the Adviser from the Commission See Investment Company Act Release No 30377 (February 5 2013) (File No 812-13895) The ETFs in which the Fund may invest include Index Fund Shares (as described in Nasdaq Rule 5705) Portfolio Depository Receipts (as described in Nasdaq Rule 5705) and Managed Fund Shares (as described in Nasdaq Rule 5735) While the Fund may invest in inverse ETFs the Fund will not invest in leveraged or inverse leveraged (eg 2X or -3X) ETFs
SR-NASDAQ-2015-011 Amendment No 2 Page 40 of 64
At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade To be considered
ldquoinvestment graderdquo under normal market conditions rated Floating Rate Debt
Instruments will carry at the time of purchase a rating in the highest four rating
categories of at least one nationally recognized statistical ratings organization
(ldquoNRSROrdquo) (eg BBB- or higher by Standard amp Poorrsquos Ratings Services (ldquoSampPrdquo)
andor Fitch Ratings (ldquoFitchrdquo) or Baa3 or higher by Moodyrsquos Investors Service Inc
(ldquoMoodyrsquosrdquo)18 For unrated securities to be considered ldquoinvestment graderdquo under normal
market conditions such securities will be determined at the time of purchase to be of
comparable quality19 by the Adviser The Fund may invest up to 35 of its net assets in
securities that are at the time of investment rated below investment grade by each
NRSRO rating such securities (or securities that are unrated and determined by the
17 The liquidity of a security especially in the case of asset-backed and mortgage-backed securities will be a substantial factor in the Fundrsquos security selection process Consistent with the discussion below under ldquoInvestment Restrictionsrdquo the Fund will not purchase any Floating Rate Debt Instruments (including asset-backed securities and mortgage-backed securities) that in the Adviserrsquos opinion are illiquid if as a result more than 15 of the value of the Fundrsquos net assets will be invested in illiquid assets
18 For the avoidance of doubt if a security is rated by multiple NRSROs and receives different ratings the Fund will treat the security as being rated in the highest rating category received from an NRSRO
19 Comparable quality of unrated securities will be determined by the Adviser based on fundamental credit analysis of the unrated security and comparable NRSRO-rated securities On a best efforts basis the Adviser will attempt to make a rating determination based on publicly available data In making a ldquocomparable qualityrdquo determination the Adviser may consider for example whether the issuer of the security has issued other rated securities the nature and provisions of the relevant security whether the obligations under the relevant security are guaranteed by another entity and the rating of such guarantor (if any) relevant cash flows macroeconomic analysis andor sector or industry analysis
SR-NASDAQ-2015-011 Amendment No 2 Page 41 of 64
Adviser to be of comparable quality) commonly referred to as ldquohigh yieldrdquo or ldquojunkrdquo
bonds If subsequent to purchase by the Fund a security held by the Fund experiences a
decline in credit quality and falls below investment grade the Fund may continue to hold
the security and it will not cause the Fund to violate the 35 investment limitation
however the security will be taken into account for purposes of determining whether
purchases of additional securities will cause the Fund to violate such limitation
The Fund will limit its investments in asset-backed securities (excluding agency
mortgage-backed securities) and non-agency mortgage-backed securities (in the
aggregate) to 20 of its net assets20 In addition the Fund will limit its investments in
junior loans to 20 of its net assets
The Fund will hold debt securities (including in the aggregate Floating Rate
Debt Instruments and the fixed-rate debt securities described below) of at least 13
non-affiliated issuers
Other Investments
Under normal market conditions the Fund will invest primarily in the Floating
Rate Debt Instruments described above to meet its investment objective In addition the
Fund may invest up to 20 of its net assets in the following types of fixed-rate debt
securities corporate21 and government bonds and notes agency securities22 instruments
20 For the avoidance of doubt there is no limitation on the Fundrsquos investments in agency mortgage-backed securities
21 See footnote 10 above
22 See footnote 11 above
SR-NASDAQ-2015-011 Amendment No 2 Page 42 of 64
of non-US issuers in developed markets privately-issued securities 23 asset-backed
securities 24 mortgage-backed securities 25 municipal bonds money market securities26
and investment companies27 (including investment companies advised by the Adviser)
that invest primarily in the foregoing types of debt securities
Further to pursue its investment objective the Fund may invest up to 20 of the
value of its net assets in exchange-listed options on US Treasury futures contracts and
exchange-listed US Treasury futures contracts28 The use of these derivative
transactions may allow the Fund to obtain net long or short exposures to selected interest
rates These derivatives may also be used to hedge risks including interest rate risks and
credit risks associated with the Fundrsquos portfolio investments The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
23 See footnote 12 above
24 See footnote 13 above
25 See footnote 14 above
26 ldquoMoney market securitiesrdquo for these purposes generally includes short-term high-quality obligations issued or guaranteed by the US Treasury or the agencies or instrumentalities of the US government short-term high-quality securities issued or guaranteed by non-US governments agencies and instrumentalities repurchase agreements commercial paper (both asset-backed and non-assetshybacked) and deposits and other obligations of US and non-US banks and financial institutions
27 See footnote 16 above
28 At least 90 of the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be invested in instruments that trade in markets that are members of the Intermarket Surveillance Group (ldquoISGrdquo) (see footnote 40 below) or are parties to a comprehensive surveillance sharing agreement with the Exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 43 of 64
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index
Investment Restrictions
The Fund will not invest 25 or more of the value of its total assets in securities
of issuers in any one industry This restriction does not apply to (a) obligations issued or
guaranteed by the US government its agencies or instrumentalities or (b) securities of
other investment companies29
The Fund may hold up to an aggregate amount of 15 of its net assets in illiquid
assets (calculated at the time of investment) including Rule 144A securities deemed
illiquid by the Adviser30 The Fund will monitor its portfolio liquidity on an ongoing
basis to determine whether in light of current circumstances an adequate level of
liquidity is being maintained and will consider taking appropriate steps in order to
maintain adequate liquidity if through a change in values net assets or other
circumstances more than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid
assets include securities subject to contractual or other restrictions on resale and other
29 See Form N-1A Item 9 The Commission has taken the position that a fund is concentrated if it invests more than 25 of the value of its total assets in any one industry See eg Investment Company Act Release No 9011 (October 30 1975) 40 FR 54241 (November 21 1975)
30 In reaching liquidity decisions the Adviser may consider the following factors the frequency of trades and quotes for the security the number of dealers wishing to purchase or sell the security and the number of other potential purchasers dealer undertakings to make a market in the security and the nature of the security and the nature of the marketplace in which it trades (eg the time needed to dispose of the security the method of soliciting offers and the mechanics of transfer)
SR-NASDAQ-2015-011 Amendment No 2 Page 44 of 64
instruments that lack readily available markets as determined in accordance with
Commission staff guidance31
The Fund will not invest in non-US equity securities
Creation and Redemption of Shares
The Fund will issue and redeem Shares on a continuous basis at net asset value
(ldquoNAVrdquo)32 only in large blocks of Shares (ldquoCreation Unitsrdquo) in transactions with
authorized participants generally including broker-dealers and large institutional
investors (ldquoAuthorized Participantsrdquo) Creation Units generally will consist of 50000
Shares although this may change from time to time Creation Units however are not
expected to consist of less than 50000 Shares As described in the Registration
Statement and consistent with the Exemptive Relief the Fund will issue and redeem
Creation Units in exchange for an in-kind portfolio of instruments andor cash in lieu of
31 The Commission has stated that long-standing Commission guidelines have required open-end funds to hold no more than 15 of their net assets in illiquid securities and other illiquid assets See Investment Company Act Release No 28193 (March 11 2008) 73 FR 14618 (March 18 2008) footnote 34 See also Investment Company Act Release No 5847 (October 21 1969) 35 FR 19989 (December 31 1970) (Statement Regarding ldquoRestricted Securitiesrdquo) Investment Company Act Release No 18612 (March 12 1992) 57 FR 9828 (March 20 1992) (Revisions of Guidelines to Form N-1A) A fundrsquos portfolio security is illiquid if it cannot be disposed of in the ordinary course of business within seven days at approximately the value ascribed to it by the fund See Investment Company Act Release No 14983 (March 12 1986) 51 FR 9773 (March 21 1986) (adopting amendments to Rule 2a-7 under the 1940 Act) Investment Company Act Release No 17452 (April 23 1990) 55 FR 17933 (April 30 1990) (adopting Rule 144A under the Securities Act of 1933)
32 The NAV of the Fundrsquos Shares generally will be calculated once daily Monday through Friday as of the close of regular trading on the New York Stock Exchange generally 400 pm Eastern Time (the ldquoNAV Calculation Timerdquo) NAV per Share will be calculated by dividing the Fundrsquos net assets by the number of Fund Shares outstanding For more information regarding the valuation of Fund investments in calculating the Fundrsquos NAV see the Registration Statement
SR-NASDAQ-2015-011 Amendment No 2 Page 45 of 64
such instruments (the ldquoCreation Basketrdquo) In addition if there is a difference between the
NAV attributable to a Creation Unit and the market value of the Creation Basket
exchanged for the Creation Unit the party conveying instruments with the lower value
will pay to the other an amount in cash equal to the difference (referred to as the ldquoCash
Componentrdquo)
Creations and redemptions must be made by or through an Authorized Participant
that has executed an agreement that has been agreed to by the Distributor and BNY with
respect to creations and redemptions of Creation Units All standard orders to create
Creation Units must be received by the transfer agent no later than the closing time of the
regular trading session on the New York Stock Exchange (ordinarily 400 pm Eastern
Time) (the ldquoClosing Timerdquo) in each case on the date such order is placed in order for the
creation of Creation Units to be effected based on the NAV of Shares as next determined
on such date after receipt of the order in proper form Shares may be redeemed only in
Creation Units at their NAV next determined after receipt not later than the Closing Time
of a redemption request in proper form by the Fund through the transfer agent and only
on a business day
The Fundrsquos custodian through the National Securities Clearing Corporation will
make available on each business day prior to the opening of business of the Exchange
the list of the names and quantities of the instruments comprising the Creation Basket as
well as the estimated Cash Component (if any) for that day The published Creation
Basket will apply until a new Creation Basket is announced on the following business
day prior to commencement of trading in the Shares
SR-NASDAQ-2015-011 Amendment No 2 Page 46 of 64
Net Asset Value
The Fundrsquos NAV will be determined as of the close of trading (normally
400 pm Eastern Time) on each day the New York Stock Exchange is open for
business NAV will be calculated for the Fund by taking the market price of the Fundrsquos
total assets including interest or dividends accrued but not yet collected less all
liabilities and dividing such amount by the total number of Shares outstanding The
result rounded to the nearest cent will be the NAV per Share All valuations will be
subject to review by the Board of Trustees of the Trust (ldquoTrust Boardrdquo) or its delegate
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with valuation procedures (which may be revised from time to time) adopted by the Trust
Board (the ldquoValuation Proceduresrdquo) and in accordance with the 1940 Act A market
valuation generally means a valuation (i) obtained from an exchange an independent
pricing service (ldquoPricing Servicerdquo) or a major market maker (or dealer) or (ii) based on a
price quotation or other equivalent indication of value supplied by an exchange a Pricing
Service or a major market maker (or dealer) The information summarized below is
based on the Valuation Procedures as currently in effect however as noted above the
Valuation Procedures are amended from time to time and therefore such information is
subject to change
Certain securities including Floating Rate Debt Instruments in which the Fund
may invest will not be listed on any securities exchange or board of trade Such
securities will typically be bought and sold by institutional investors in individually
negotiated private transactions that function in many respects like an over-the-counter
SR-NASDAQ-2015-011 Amendment No 2 Page 47 of 64
secondary market although typically no formal market makers will exist Certain
securities particularly debt securities will have few or no trades or trade infrequently
and information regarding a specific security may not be widely available or may be
incomplete Accordingly determinations of the fair value of debt securities may be
based on infrequent and dated information Because there is less reliable objective data
available elements of judgment may play a greater role in valuation of debt securities
than for other types of securities Typically Floating Rate Debt Instruments and other
debt securities in which the Fund may invest (other than those described below) will be
valued using information provided by a Pricing Service Debt securities having a
remaining maturity of 60 days or less when purchased will be valued at cost adjusted for
amortization of premiums and accretion of discounts provided the Adviserrsquos pricing
committee (the ldquoPricing Committeerdquo) has determined that the use of amortized cost is an
appropriate reflection of fair value given market and issuer-specific conditions existing at
the time of the determination Overnight repurchase agreements will be valued at cost
and term repurchase agreements (ie those whose maturity exceeds seven days) will be
valued at the average of the bid quotations obtained daily from at least two recognized
dealers
Asset-backed and mortgage-backed securities will generally be valued by using a
Pricing Service If a Pricing Service does not cover a particular asset-backed or
mortgage-backed security or discontinues covering a particular asset-backed or
mortgage-backed security the security will be priced using broker quotes generally
provided by brokers that make or participate in markets in the security To derive values
Pricing Services and broker-dealers may use matrix pricing and valuation models as well
SR-NASDAQ-2015-011 Amendment No 2 Page 48 of 64
as recent market transactions for the same or similar assets As it deems appropriate the
Pricing Committee may determine that a Pricing Service price does not represent an
accurate value of an asset-backed or mortgage-backed security based on broker quotes it
receives a recent trade in the security by the Fund information from a portfolio manager
or other market information In the event that the Pricing Committee determines that the
Pricing Service price is unreliable or inaccurate based on such other information broker
quotes may be used Additionally if the Pricing Committee determines that the price of
an asset-backed or mortgage-backed security obtained from a Pricing Service and
available broker quotes is unreliable or inaccurate due to market conditions or other
reasons or if a Pricing Service price or broker quote is unavailable the security will be
valued using fair value pricing as described below
Equity securities listed on any exchange other than the Exchange will be valued at
the last sale price on the exchange on which they are principally traded on the business
day as of which such value is being determined Equity securities listed on the Exchange
will be valued at the official closing price on the business day as of which such value is
being determined If there has been no sale on such day or no official closing price in
the case of securities traded on the Exchange the securities will be valued using fair
value pricing as described below Equity securities traded on more than one securities
exchange will be valued at the last sale price or official closing price as applicable on
the business day as of which such value is being determined at the close of the exchange
representing the principal market for such securities
Exchange-traded options and futures contracts will be valued at the closing price
in the market where such contracts are principally traded
SR-NASDAQ-2015-011 Amendment No 2 Page 49 of 64
Certain securities including Floating Rate Debt Instruments in which the Fund
will invest will not be able to be priced by pre-established pricing methods Such
securities may be valued by the Trust Board or its delegate at fair value The use of fair
value pricing by the Fund will be governed by the Valuation Procedures and conducted in
accordance with the provisions of the 1940 Act Valuing the Fundrsquos securities using fair
value pricing will result in using prices for those securities that may differ from current
market valuations or official closing prices on the applicable exchange
Availability of Information
The Fundrsquos website (wwwftportfolioscom) which will be publicly available
prior to the public offering of Shares will include a form of the prospectus for the Fund
that may be downloaded The website will include the Sharesrsquo ticker CUSIP and
exchange information along with additional quantitative information updated on a daily
basis including for the Fund (1) daily trading volume the prior business dayrsquos reported
NAV and closing price mid-point of the bidask spread at the time of calculation of such
NAV (the ldquoBidAsk Pricerdquo)33 and a calculation of the premium and discount of the
BidAsk Price against the NAV and (2) data in chart format displaying the frequency
distribution of discounts and premiums of the daily BidAsk Price against the NAV
within appropriate ranges for each of the four previous calendar quarters On each
business day before commencement of trading in Shares in the Regular Market Session34
33 The BidAsk Price of the Fund will be determined using the mid-point of the highest bid and the lowest offer on the Exchange as of the time of calculation of the Fundrsquos NAV The records relating to BidAsk Prices will be retained by the Fund and its service providers
34 See Nasdaq Rule 4120(b)(4) (describing the three trading sessions on the Exchange (1) Pre-Market Session from 4 am to 930 am Eastern Time (2)
SR-NASDAQ-2015-011 Amendment No 2 Page 50 of 64
on the Exchange the Fund will disclose on its website the identities and quantities of the
portfolio of securities and other assets (the ldquoDisclosed Portfoliordquo as defined in Nasdaq
Rule 5735(c)(2)) held by the Fund that will form the basis for the Fundrsquos calculation of
NAV at the end of the business day 35 The Fundrsquos disclosure of derivative positions in
the Disclosed Portfolio will include information that market participants can use to value
these positions intraday On a daily basis the Fund will disclose on the Fundrsquos website
the following information regarding each portfolio holding as applicable to the type of
holding ticker symbol CUSIP number or other identifier if any a description of the
holding (including the type of holding) the identity of the security or other asset or
instrument underlying the holding if any for options the option strike price quantity
held (as measured by for example par value notional value or number of shares
contracts or units) maturity date if any coupon rate if any effective date if any market
value of the holding and percentage weighting of the holding in the Fundrsquos portfolio
The website information will be publicly available at no charge
In addition for the Fund an estimated value defined in Rule 5735(c)(3) as the
ldquoIntraday Indicative Valuerdquo that reflects an estimated intraday value of the Fundrsquos
Disclosed Portfolio will be disseminated Moreover the Intraday Indicative Value
Regular Market Session from 930 am to 4 pm or 415 pm Eastern Time and (3) Post-Market Session from 4 pm or 415 pm to 8 pm Eastern Time)
Under accounting procedures to be followed by the Fund trades made on the prior business day (ldquoTrdquo) will be booked and reflected in NAV on the current business day (ldquoT+1rdquo) Accordingly the Fund will be able to disclose at the beginning of the business day the portfolio that will form the basis for the NAV calculation at the end of the business day
35
SR-NASDAQ-2015-011 Amendment No 2 Page 51 of 64
available on the NASDAQ OMX Information LLC proprietary index data service36 will
be based upon the current value for the components of the Disclosed Portfolio and will be
updated and widely disseminated by one or more major market data vendors and broadly
displayed at least every 15 seconds during the Regular Market Session The Intraday
Indicative Value will be based on quotes and closing prices from the securitiesrsquo local
market and may not reflect events that occur subsequent to the local marketrsquos close
Premiums and discounts between the Intraday Indicative Value and the market price may
occur This should not be viewed as a ldquoreal timerdquo update of the NAV per Share of the
Fund which is calculated only once a day
The dissemination of the Intraday Indicative Value together with the Disclosed
Portfolio will allow investors to determine the value of the underlying portfolio of the
Fund on a daily basis and will provide a close estimate of that value throughout the
trading day
Investors will also be able to obtain the Fundrsquos Statement of Additional
Information (ldquoSAIrdquo) the Fundrsquos annual and semi-annual reports (together ldquoShareholder
Reportsrdquo) and its Form N-CSR and Form N-SAR filed twice a year The Fundrsquos SAI
and Shareholder Reports will be available free upon request from the Fund and those
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or
downloaded from the Commissionrsquos website at wwwsecgov Information regarding
Currently the NASDAQ OMX Global Index Data Service (ldquoGIDSrdquo) is the NASDAQ OMX global index data feed service offering real-time updates daily summary messages and access to widely followed indexes and Intraday Indicative Values for ETFs GIDS provides investment professionals with the daily information needed to track or trade NASDAQ OMX indexes listed ETFs or third-party partner indexes and ETFs
36
SR-NASDAQ-2015-011 Amendment No 2 Page 52 of 64
market price and trading volume of the Shares will be continually available on a real-time
basis throughout the day on brokersrsquo computer screens and other electronic services
Information regarding the previous dayrsquos closing price and trading volume information
for the Shares will be published daily in the financial section of newspapers Quotation
and last sale information for the Shares will be available via Nasdaq proprietary quote
and trade services as well as in accordance with the Unlisted Trading Privileges and the
Consolidated Tape Association (ldquoCTArdquo) plans for the Shares Quotation and last sale
information for the other ETFs in which the Fund will invest will be available via the
quote and trade services of their respective primary exchanges as well as in accordance
with the Unlisted Trading Privileges and the CTA plans as applicable Quotation and
last sale information for US exchange-traded options will be available via the Options
Price Reporting Authority Intraday executable price quotations on Floating Rate Debt
Instruments and other assets not traded on an exchange will be available from major
broker-dealer firms or market data vendors as well as from automated quotation systems
published or other public sources or online information services Additionally the Trade
Reporting and Compliance Engine (ldquoTRACErdquo) of the Financial Industry Regulatory
Authority (ldquoFINRArdquo) will be a source of price information for corporate bonds
privately-issued securities mortgage-backed securities and asset-backed securities to the
extent transactions in such securities are reported to TRACE37 For exchange-traded
Broker-dealers that are FINRA member firms have an obligation to report transactions in specified debt securities to TRACE to the extent required under applicable FINRA rules Generally such debt securities will have at issuance a maturity that exceeds one calendar year
37
SR-NASDAQ-2015-011 Amendment No 2 Page 53 of 64
assets intraday pricing information will be available directly from the applicable listing
exchange
Additional information regarding the Fund and the Shares including investment
strategies risks creation and redemption procedures fees Fund holdings disclosure
policies distributions and taxes will be included in the Registration Statement
Initial and Continued Listing
The Shares will be subject to Rule 5735 which sets forth the initial and continued
listing criteria applicable to Managed Fund Shares The Exchange represents that for
initial andor continued listing the Fund must be in compliance with Rule 10A-338 under
the Act A minimum of 100000 Shares will be outstanding at the commencement of
trading on the Exchange The Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the NAV and the
Disclosed Portfolio will be made available to all market participants at the same time
Trading Halts
With respect to trading halts the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading in the Shares of the Fund Nasdaq will
halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12) Trading may be
halted because of market conditions or for reasons that in the view of the Exchange
make trading in the Shares inadvisable These may include (1) the extent to which
trading is not occurring in the securities andor the other assets constituting the Disclosed
Portfolio of the Fund or (2) whether other unusual conditions or circumstances
See 17 CFR 24010A-3 38
SR-NASDAQ-2015-011 Amendment No 2 Page 54 of 64
detrimental to the maintenance of a fair and orderly market are present Trading in the
Shares also will be subject to Rule 5735(d)(2)(D) which sets forth circumstances under
which Shares of the Fund may be halted
Trading Rules
Nasdaq deems the Shares to be equity securities thus rendering trading in the
Shares subject to Nasdaqrsquos existing rules governing the trading of equity securities
Nasdaq will allow trading in the Shares from 400 am until 800 pm Eastern Time
The Exchange has appropriate rules to facilitate transactions in the Shares during all
trading sessions As provided in Nasdaq Rule 5735(b)(3) the minimum price variation
for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $001
Surveillance
The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws39 The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities laws
The surveillances referred to above generally focus on detecting securities trading
outside their normal patterns which could be indicative of manipulative or other violative
activity When such situations are detected surveillance analysis follows and
FINRA surveils trading on the Exchange pursuant to a regulatory services agreement The Exchange is responsible for FINRArsquos performance under this regulatory services agreement
39
SR-NASDAQ-2015-011 Amendment No 2 Page 55 of 64
investigations are opened where appropriate to review the behavior of all relevant
parties for all relevant trading violations
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 56 of 64
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
SR-NASDAQ-2015-011 Amendment No 2 Page 57 of 64
2 Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
SR-NASDAQ-2015-011 Amendment No 2 Page 58 of 64
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
SR-NASDAQ-2015-011 Amendment No 2 Page 59 of 64
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
SR-NASDAQ-2015-011 Amendment No 2 Page 60 of 64
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 61 of 64
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
SR-NASDAQ-2015-011 Amendment No 2 Page 62 of 64
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
B Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
C Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received From Members Participants or Others
Written comments were neither solicited nor received
III Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Within 45 days of the date of publication of this notice in the Federal Register or
within such longer period (i) as the Commission may designate up to 90 days of such date
if it finds such longer period to be appropriate and publishes its reasons for so finding or
(ii) as to which the Exchange consents the Commission shall (a) by order approve or
disapprove such proposed rule change or (b) institute proceedings to determine whether
the proposed rule change should be disapproved
SR-NASDAQ-2015-011 Amendment No 2 Page 63 of 64
IV Solicitation of Comments
Interested persons are invited to submit written data views and arguments
concerning the foregoing including whether the proposed rule change is consistent with
the Act Comments may be submitted by any of the following methods
Electronic comments
bull Use the Commissionrsquos Internet comment form
(httpwwwsecgovrulessroshtml) or
bull Send an e-mail to rule-commentssecgov Please include File Number
SR-NASDAQ-2015-011 on the subject line
Paper comments
bull Send paper comments in triplicate to Brent J Fields Secretary Securities and
Exchange Commission Station Place 100 F Street NE Washington DC
20549-9303
All submissions should refer to File Number SR-NASDAQ-2015-011 This file number
should be included on the subject line if e-mail is used To help the Commission process
and review your comments more efficiently please use only one method The
Commission will post all comments on the Commissionrsquos Internet website
httpwwwsecgovrulessroshtml
Copies of the submission all subsequent amendments all written statements with
respect to the proposed rule change that are filed with the Commission and all written
communications relating to the proposed rule change between the Commission and any
person other than those that may be withheld from the public in accordance with the
provisions of 5 USC 552 will be available for website viewing and printing in the
Commissionrsquos Public Reference Room 100 F Street NE Washington DC 20549 on
SR-NASDAQ-2015-011 Amendment No 2 Page 64 of 64
official business days between the hours of 1000 am and 300 pm Copies of the filing
also will be available for inspection and copying at the principal office of Nasdaq All
comments received will be posted without change the Commission does not edit
personal identifying information from submissions You should submit only information
that you wish to make available publicly
All submissions should refer to File Number SR-NASDAQ-2015-011 and should
be submitted on or before [insert date 21 days from publication in the Federal Register]
For the Commission by the Division of Trading and Markets pursuant to
delegated authority41
Kevin M OrsquoNeill Deputy Secretary
17 CFR 20030-3(a)(12) 41
SR-NASDAQ-2015-011 Amendment No 2 Page 28 of 64
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
SR-NASDAQ-2015-011 Amendment No 2 Page 29 of 64
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
SR-NASDAQ-2015-011 Amendment No 2 Page 30 of 64
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
SR-NASDAQ-2015-011 Amendment No 2 Page 31 of 64
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
4 Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
5 Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received from Members Participants or Others
Written comments were neither solicited nor received
6 Extension of Time Period for Commission Action
The Exchange does not consent at this time to an extension of any time period for
Commission action
7 Basis for Summary Effectiveness Pursuant to Section 19(b)(3) or for Accelerated Effectiveness Pursuant to Section 19(b)(2)
Not applicable
8 Proposed Rule Change Based on Rules of Another Self-Regulatory Organization or of the Commission
Not applicable
9 Security-Based Swap Submissions Filed Pursuant to Section 3C of the Act
Not applicable
SR-NASDAQ-2015-011 Amendment No 2 Page 32 of 64
10 Advance Notices Filed Pursuant to Section 806(e) of the Payment Clearing and Settlement Supervision Act
Not applicable
11 Exhibits
1 Completed notice of proposed rule change for publication in the Federal
Register
SR-NASDAQ-2015-011 Amendment No 2 Page 33 of 64
EXHIBIT 1
SECURITIES AND EXCHANGE COMMISSION (Release No 34shy File No SR-NASDAQ-2015-011)
April __ 2015
Self-Regulatory Organizations The NASDAQ Stock Market LLC Notice of Filing of Proposed Rule Change Relating to the Listing and Trading of the Shares of the First Trust Strategic Floating Rate ETF of First Trust Exchange-Traded Fund IV
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (ldquoActrdquo)1 and
Rule 19b-4 thereunder2 notice is hereby given that on February 12 2015 The NASDAQ
Stock Market LLC (ldquoNasdaqrdquo or the ldquoExchangerdquo) filed with the Securities and Exchange
Commission (ldquoCommissionrdquo) the proposed rule change as described in in Items I II and
III below which Items have been prepared by Nasdaq On April 6 2015 Nasdaq filed
Amendment No 1 which replaced the text of the original filing in its entirety On April
15 2015 Nasdaq filed Amendment No 2 which replaced the text of the original filing in
its entirety The Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons
I Self-Regulatory Organizationrsquos Statement of the Terms of Substance of the Proposed Rule Change
Nasdaq proposes to list and trade the shares of the First Trust Strategic Floating
Rate ETF (the ldquoFundrdquo) of the First Trust Strategic Floating Rate ETF (the ldquoFundrdquo) of
First Trust Exchange-Traded Fund IV (the ldquoTrustrdquo) under Nasdaq Rule 5735 (ldquoManaged
1 15 USC 78s(b)(1)
2 17 CFR 24019b-4
SR-NASDAQ-2015-011 Amendment No 2 Page 34 of 64
Fund Sharesrdquo)3 The shares of the Fund are collectively referred to herein as the
ldquoSharesrdquo
The text of the proposed rule change is available at
httpnasdaqcchwallstreetcom at Nasdaqrsquos principal office and at the Commissionrsquos
Public Reference Room
II Self-Regulatory Organizationrsquos Statement of the Purpose of and Statutory Basis for the Proposed Rule Change
In its filing with the Commission Nasdaq included statements concerning the
purpose of and basis for the proposed rule change The text of these statements may be
examined at the places specified in Item IV below Nasdaq has prepared summaries set
forth in Sections A B and C below of the most significant aspects of such statements
A Self-Regulatory Organizationrsquos Statement of the Purpose of and Statutory Basis for the Proposed Rule Change
1 Purpose
The Exchange proposes to list and trade the Shares of the Fund under Nasdaq
Rule 5735 which governs the listing and trading of Managed Fund Shares4 on the
3 The Commission approved Nasdaq Rule 5735 in Securities Exchange Act Release No 57962 (June 13 2008) 73 FR 35175 (June 20 2008) (SR-NASDAQ-2008shy039) There are already multiple actively-managed funds listed on the Exchange see eg Securities Exchange Act Release Nos 69464 (April 26 2013) 78 FR 25774 (May 2 2013) (SR-NASDAQ-2013-036) (order approving listing and trading of First Trust Senior Loan Fund) 68972 (February 22 2013) 78 FR 13721 (February 28 2013) (SR-NASDAQ-2012-147) (order approving listing and trading of First Trust High Yield LongShort ETF) 66489 (February 29 2012) 77 FR 13379 (March 6 2012) (SR-NASDAQ-2012-004) (order approving listing and trading of WisdomTree Emerging Markets Corporate Bond Fund) The Exchange believes the proposed rule change raises no significant issues not previously addressed in those prior Commission orders
4 A Managed Fund Share is a security that represents an interest in an investment company registered under the Investment Company Act of 1940 (15 USC 80ashy
SR-NASDAQ-2015-011 Amendment No 2 Page 35 of 64
Exchange The Fund will be an actively-managed exchange-traded fund (ldquoETFrdquo) The
Shares will be offered by the Trust which was established as a Massachusetts business
trust on September 15 20105 The Trust is registered with the Commission as an
investment company and has filed a registration statement on Form N-1A (ldquoRegistration
Statementrdquo) with the Commission6 The Fund will be a series of the Trust The Fund
intends to qualify each year as a regulated investment company (ldquoRICrdquo) under
Subchapter M of the Internal Revenue Code of 1986 as amended
First Trust Advisors LP will be the investment adviser (ldquoAdviserrdquo) to the Fund
First Trust Portfolios LP (the ldquoDistributorrdquo) will be the principal underwriter and
distributor of the Fundrsquos Shares The Bank of New York Mellon Corporation (ldquoBNYrdquo)
will act as the administrator accounting agent custodian and transfer agent to the Fund
1) (the ldquo1940 Actrdquo) organized as an open-end investment company or similar entity that invests in a portfolio of securities selected by its investment adviser consistent with its investment objectives and policies In contrast an open-end investment company that issues Index Fund Shares listed and traded on the Exchange under Nasdaq Rule 5705 seeks to provide investment results that correspond generally to the price and yield performance of a specific foreign or domestic stock index fixed income securities index or combination thereof
5 The Commission has issued an order upon which the Trust may rely granting certain exemptive relief under the 1940 Act See Investment Company Act Release No 30029 (April 10 2012) (File No 812-13795) (the ldquoExemptive Reliefrdquo) In addition the Commission has issued no-action relief upon which the Trust may rely pertaining to the Fundrsquos ability to invest in derivatives notwithstanding certain representations in the application for the Exemptive Relief See Commission No-Action Letter (December 6 2012)
6 See Post-Effective Amendment No 104 to Registration Statement on Form N-1A for the Trust dated January 29 2015 (File Nos 333-174332 and 811-22559) The descriptions of the Fund and the Shares contained herein are based in part on information in the Registration Statement
7
SR-NASDAQ-2015-011 Amendment No 2 Page 36 of 64
Paragraph (g) of Rule 5735 provides that if the investment adviser to the
investment company issuing Managed Fund Shares is affiliated with a broker-dealer
such investment adviser shall erect a ldquofire wallrdquo between the investment adviser and the
broker-dealer with respect to access to information concerning the composition andor
changes to such investment company portfolio7 In addition paragraph (g) further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio Rule 5735(g) is similar
to Nasdaq Rule 5705(b)(5)(A)(i) however paragraph (g) in connection with the
establishment of a ldquofire wallrdquo between the investment adviser and the broker-dealer
reflects the applicable open-end fundrsquos portfolio not an underlying benchmark index as
is the case with index-based funds The Adviser is not a broker-dealer although it is
affiliated with the Distributor a broker-dealer The Adviser has implemented a fire wall
An investment adviser to an open-end fund is required to be registered under the Investment Advisers Act of 1940 (the ldquoAdvisers Actrdquo) As a result the Adviser and its related personnel are subject to the provisions of Rule 204A-1 under the Advisers Act relating to codes of ethics This Rule requires investment advisers to adopt a code of ethics that reflects the fiduciary nature of the relationship to clients as well as compliance with other applicable securities laws Accordingly procedures designed to prevent the communication and misuse of non-public information by an investment adviser must be consistent with Rule 204A-1 under the Advisers Act In addition Rule 206(4)-7 under the Advisers Act makes it unlawful for an investment adviser to provide investment advice to clients unless such investment adviser has (i) adopted and implemented written policies and procedures reasonably designed to prevent violation by the investment adviser and its supervised persons of the Advisers Act and the Commission rules adopted thereunder (ii) implemented at a minimum an annual review regarding the adequacy of the policies and procedures established pursuant to subparagraph (i) above and the effectiveness of their implementation and (iii) designated an individual (who is a supervised person) responsible for administering the policies and procedures adopted under subparagraph (i) above
8
SR-NASDAQ-2015-011 Amendment No 2 Page 37 of 64
with respect to its broker-dealer affiliate regarding access to information concerning the
composition andor changes to the portfolio In addition personnel who make decisions
on the Fundrsquos portfolio composition will be subject to procedures designed to prevent the
use and dissemination of material non-public information regarding the Fundrsquos portfolio
In the event (a) the Adviser becomes or becomes newly affiliated with a broker-dealer
or (b) any new adviser or sub-adviser is a registered broker-dealer or becomes affiliated
with another broker-dealer it will implement a fire wall with respect to its relevant
personnel andor such broker-dealer affiliate as applicable regarding access to
information concerning the composition andor changes to the portfolio and will be
subject to procedures designed to prevent the use and dissemination of material
non-public information regarding such portfolio The Fund does not currently intend to
use a sub-adviser
First Trust Strategic Floating Rate ETF
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions8 at least 80 of its
The term ldquounder normal market conditionsrdquo as used herein includes but is not limited to the absence of adverse market economic political or other conditions including extreme volatility or trading halts in the fixed income markets or the financial markets generally operational issues causing dissemination of inaccurate market information or force majeure type events such as systems failure natural or man-made disaster act of God armed conflict act of terrorism riot or labor disruption or any similar intervening circumstance For temporary defensive purposes during the initial invest-up period and during periods of high cash inflows or outflows the Fund may depart from its principal investment strategies for example it may hold a higher than normal proportion of its assets in cash During such periods the Fund may not be able to achieve its investment objective The Fund may adopt a defensive strategy when the Adviser believes securities in which the Fund normally invests have elevated risks due to political or economic factors and in other extraordinary circumstances
SR-NASDAQ-2015-011 Amendment No 2 Page 38 of 64
net assets in a portfolio of the following types of floating-rate9 debt instruments issued by
US and non-US public- and private-sector entities floating-rate corporate10 and
government bonds and notes floating-rate agency securities 11 floating-rate instruments
of non-US issuers floating-rate privately-issued securities 12 floating-rate asset-backed
securities 13 floating-rate mortgage-backed securities14 floating-rate loans 15 and
9 For the avoidance of doubt the term ldquofloating-raterdquo shall also include similar terms such as ldquovariable-raterdquo and ldquoadjustable-raterdquo
10 The Adviser expects that under normal market conditions generally for a corporate bond to be considered as an eligible investment after taking into account such an investment at least 75 of the Fundrsquos net assets that are invested in floating-rate corporate bonds and as described below fixed-rate corporate bonds (in the aggregate) will be comprised of corporate bonds that have at the time of original issuance $100 million or more par amount outstanding
11 ldquoAgency securitiesrdquo for these purposes generally includes securities issued by the following entities Government National Mortgage Association (Ginnie Mae) Federal National Mortgage Association (Fannie Mae) Federal Home Loan Banks (FHLBanks) Federal Home Loan Mortgage Corporation (Freddie Mac) Farm Credit System (FCS) Farm Credit Banks (FCBanks) Student Loan Marketing Association (Sallie Mae) Resolution Funding Corporation (REFCORP) Financing Corporation (FICO) and the Farm Credit System (FCS) Financial Assistance Corporation (FAC) Agency securities can include but are not limited to mortgage-backed securities
12 ldquoPrivately-issued securitiesrdquo for these purposes generally includes Rule 144A securities other than mortgage-backed Rule 144A securities Under normal market conditions privately-issued securities will have at the time of original issuance $100 million or more principal amount outstanding to be considered eligible investments
13 Asset-backed securities are securities that are backed by a pool of assets The Fund currently intends to invest in asset-backed securities that are consumer asset-backed securities
14 Mortgage-backed securities which are securities that directly or indirectly represent a participation in or are secured by and payable from mortgage loans on real property will consist of (1) residential mortgage-backed securities (ldquoRMBSrdquo) (2) commercial mortgage-backed securities (ldquoCMBSrdquo) (3) stripped mortgage-backed securities (ldquoSMBSrdquo) which are mortgage-backed securities
SR-NASDAQ-2015-011 Amendment No 2 Page 39 of 64
investment companies16 (including investment companies advised by the Adviser) that
invest primarily in the foregoing types of debt instruments17 (collectively ldquoFloating Rate
Debt Instrumentsrdquo)
where mortgage payments are divided between paying the loanrsquos principal and paying the loanrsquos interest (4) collateralized mortgage obligations (ldquoCMOsrdquo) and real estate mortgage investment conduits (ldquoREMICsrdquo) which are mortgage-backed securities that are divided into multiple classes with each class being entitled to a different share of the principal and interest payments received from the pool of underlying assets
15 The floating-rate loans in which the Fund will invest will represent amounts borrowed by companies or other entities from banks and other lenders and a significant portion of such floating-rate loans may be rated below investment grade or unrated Floating-rate loans held by the Fund may be senior or subordinate obligations of the borrower and may or may not be secured by collateral First lien senior secured floating-rate loans are referred to herein as ldquosenior loansrdquo Floating-rate loans that are not senior loans (ie unsecured floating-rate loans and secured floating-rate loans that are not first lien floating-rate loans) are referred to herein as ldquojunior loansrdquo The Fund will generally invest in floating-rate loans that the Adviser deems to be liquid with readily available prices notwithstanding the foregoing the Fund may invest in floating-rate loans that are deemed illiquid so long as the Fund complies with the 15 limitation on investments of its net assets in illiquid assets described below under ldquoInvestment Restrictionsrdquo
16 The Fund currently anticipates investing only in registered open-end investment companies that are listed and traded in the US on registered exchanges (ie other ETFs) An ETF is an investment company registered under the 1940 Act that holds a portfolio of securities Many ETFs are designed to track the performance of a securities index including industry sector country and region indexes The Fund may invest in the securities of ETFs in excess of the limits imposed under the 1940 Act pursuant to exemptive orders obtained by other ETFs and their sponsors from the Commission In addition the Fund may invest in the securities of certain investment companies in excess of the limits imposed under the 1940 Act pursuant to an exemptive order obtained by the Trust and the Adviser from the Commission See Investment Company Act Release No 30377 (February 5 2013) (File No 812-13895) The ETFs in which the Fund may invest include Index Fund Shares (as described in Nasdaq Rule 5705) Portfolio Depository Receipts (as described in Nasdaq Rule 5705) and Managed Fund Shares (as described in Nasdaq Rule 5735) While the Fund may invest in inverse ETFs the Fund will not invest in leveraged or inverse leveraged (eg 2X or -3X) ETFs
SR-NASDAQ-2015-011 Amendment No 2 Page 40 of 64
At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade To be considered
ldquoinvestment graderdquo under normal market conditions rated Floating Rate Debt
Instruments will carry at the time of purchase a rating in the highest four rating
categories of at least one nationally recognized statistical ratings organization
(ldquoNRSROrdquo) (eg BBB- or higher by Standard amp Poorrsquos Ratings Services (ldquoSampPrdquo)
andor Fitch Ratings (ldquoFitchrdquo) or Baa3 or higher by Moodyrsquos Investors Service Inc
(ldquoMoodyrsquosrdquo)18 For unrated securities to be considered ldquoinvestment graderdquo under normal
market conditions such securities will be determined at the time of purchase to be of
comparable quality19 by the Adviser The Fund may invest up to 35 of its net assets in
securities that are at the time of investment rated below investment grade by each
NRSRO rating such securities (or securities that are unrated and determined by the
17 The liquidity of a security especially in the case of asset-backed and mortgage-backed securities will be a substantial factor in the Fundrsquos security selection process Consistent with the discussion below under ldquoInvestment Restrictionsrdquo the Fund will not purchase any Floating Rate Debt Instruments (including asset-backed securities and mortgage-backed securities) that in the Adviserrsquos opinion are illiquid if as a result more than 15 of the value of the Fundrsquos net assets will be invested in illiquid assets
18 For the avoidance of doubt if a security is rated by multiple NRSROs and receives different ratings the Fund will treat the security as being rated in the highest rating category received from an NRSRO
19 Comparable quality of unrated securities will be determined by the Adviser based on fundamental credit analysis of the unrated security and comparable NRSRO-rated securities On a best efforts basis the Adviser will attempt to make a rating determination based on publicly available data In making a ldquocomparable qualityrdquo determination the Adviser may consider for example whether the issuer of the security has issued other rated securities the nature and provisions of the relevant security whether the obligations under the relevant security are guaranteed by another entity and the rating of such guarantor (if any) relevant cash flows macroeconomic analysis andor sector or industry analysis
SR-NASDAQ-2015-011 Amendment No 2 Page 41 of 64
Adviser to be of comparable quality) commonly referred to as ldquohigh yieldrdquo or ldquojunkrdquo
bonds If subsequent to purchase by the Fund a security held by the Fund experiences a
decline in credit quality and falls below investment grade the Fund may continue to hold
the security and it will not cause the Fund to violate the 35 investment limitation
however the security will be taken into account for purposes of determining whether
purchases of additional securities will cause the Fund to violate such limitation
The Fund will limit its investments in asset-backed securities (excluding agency
mortgage-backed securities) and non-agency mortgage-backed securities (in the
aggregate) to 20 of its net assets20 In addition the Fund will limit its investments in
junior loans to 20 of its net assets
The Fund will hold debt securities (including in the aggregate Floating Rate
Debt Instruments and the fixed-rate debt securities described below) of at least 13
non-affiliated issuers
Other Investments
Under normal market conditions the Fund will invest primarily in the Floating
Rate Debt Instruments described above to meet its investment objective In addition the
Fund may invest up to 20 of its net assets in the following types of fixed-rate debt
securities corporate21 and government bonds and notes agency securities22 instruments
20 For the avoidance of doubt there is no limitation on the Fundrsquos investments in agency mortgage-backed securities
21 See footnote 10 above
22 See footnote 11 above
SR-NASDAQ-2015-011 Amendment No 2 Page 42 of 64
of non-US issuers in developed markets privately-issued securities 23 asset-backed
securities 24 mortgage-backed securities 25 municipal bonds money market securities26
and investment companies27 (including investment companies advised by the Adviser)
that invest primarily in the foregoing types of debt securities
Further to pursue its investment objective the Fund may invest up to 20 of the
value of its net assets in exchange-listed options on US Treasury futures contracts and
exchange-listed US Treasury futures contracts28 The use of these derivative
transactions may allow the Fund to obtain net long or short exposures to selected interest
rates These derivatives may also be used to hedge risks including interest rate risks and
credit risks associated with the Fundrsquos portfolio investments The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
23 See footnote 12 above
24 See footnote 13 above
25 See footnote 14 above
26 ldquoMoney market securitiesrdquo for these purposes generally includes short-term high-quality obligations issued or guaranteed by the US Treasury or the agencies or instrumentalities of the US government short-term high-quality securities issued or guaranteed by non-US governments agencies and instrumentalities repurchase agreements commercial paper (both asset-backed and non-assetshybacked) and deposits and other obligations of US and non-US banks and financial institutions
27 See footnote 16 above
28 At least 90 of the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be invested in instruments that trade in markets that are members of the Intermarket Surveillance Group (ldquoISGrdquo) (see footnote 40 below) or are parties to a comprehensive surveillance sharing agreement with the Exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 43 of 64
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index
Investment Restrictions
The Fund will not invest 25 or more of the value of its total assets in securities
of issuers in any one industry This restriction does not apply to (a) obligations issued or
guaranteed by the US government its agencies or instrumentalities or (b) securities of
other investment companies29
The Fund may hold up to an aggregate amount of 15 of its net assets in illiquid
assets (calculated at the time of investment) including Rule 144A securities deemed
illiquid by the Adviser30 The Fund will monitor its portfolio liquidity on an ongoing
basis to determine whether in light of current circumstances an adequate level of
liquidity is being maintained and will consider taking appropriate steps in order to
maintain adequate liquidity if through a change in values net assets or other
circumstances more than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid
assets include securities subject to contractual or other restrictions on resale and other
29 See Form N-1A Item 9 The Commission has taken the position that a fund is concentrated if it invests more than 25 of the value of its total assets in any one industry See eg Investment Company Act Release No 9011 (October 30 1975) 40 FR 54241 (November 21 1975)
30 In reaching liquidity decisions the Adviser may consider the following factors the frequency of trades and quotes for the security the number of dealers wishing to purchase or sell the security and the number of other potential purchasers dealer undertakings to make a market in the security and the nature of the security and the nature of the marketplace in which it trades (eg the time needed to dispose of the security the method of soliciting offers and the mechanics of transfer)
SR-NASDAQ-2015-011 Amendment No 2 Page 44 of 64
instruments that lack readily available markets as determined in accordance with
Commission staff guidance31
The Fund will not invest in non-US equity securities
Creation and Redemption of Shares
The Fund will issue and redeem Shares on a continuous basis at net asset value
(ldquoNAVrdquo)32 only in large blocks of Shares (ldquoCreation Unitsrdquo) in transactions with
authorized participants generally including broker-dealers and large institutional
investors (ldquoAuthorized Participantsrdquo) Creation Units generally will consist of 50000
Shares although this may change from time to time Creation Units however are not
expected to consist of less than 50000 Shares As described in the Registration
Statement and consistent with the Exemptive Relief the Fund will issue and redeem
Creation Units in exchange for an in-kind portfolio of instruments andor cash in lieu of
31 The Commission has stated that long-standing Commission guidelines have required open-end funds to hold no more than 15 of their net assets in illiquid securities and other illiquid assets See Investment Company Act Release No 28193 (March 11 2008) 73 FR 14618 (March 18 2008) footnote 34 See also Investment Company Act Release No 5847 (October 21 1969) 35 FR 19989 (December 31 1970) (Statement Regarding ldquoRestricted Securitiesrdquo) Investment Company Act Release No 18612 (March 12 1992) 57 FR 9828 (March 20 1992) (Revisions of Guidelines to Form N-1A) A fundrsquos portfolio security is illiquid if it cannot be disposed of in the ordinary course of business within seven days at approximately the value ascribed to it by the fund See Investment Company Act Release No 14983 (March 12 1986) 51 FR 9773 (March 21 1986) (adopting amendments to Rule 2a-7 under the 1940 Act) Investment Company Act Release No 17452 (April 23 1990) 55 FR 17933 (April 30 1990) (adopting Rule 144A under the Securities Act of 1933)
32 The NAV of the Fundrsquos Shares generally will be calculated once daily Monday through Friday as of the close of regular trading on the New York Stock Exchange generally 400 pm Eastern Time (the ldquoNAV Calculation Timerdquo) NAV per Share will be calculated by dividing the Fundrsquos net assets by the number of Fund Shares outstanding For more information regarding the valuation of Fund investments in calculating the Fundrsquos NAV see the Registration Statement
SR-NASDAQ-2015-011 Amendment No 2 Page 45 of 64
such instruments (the ldquoCreation Basketrdquo) In addition if there is a difference between the
NAV attributable to a Creation Unit and the market value of the Creation Basket
exchanged for the Creation Unit the party conveying instruments with the lower value
will pay to the other an amount in cash equal to the difference (referred to as the ldquoCash
Componentrdquo)
Creations and redemptions must be made by or through an Authorized Participant
that has executed an agreement that has been agreed to by the Distributor and BNY with
respect to creations and redemptions of Creation Units All standard orders to create
Creation Units must be received by the transfer agent no later than the closing time of the
regular trading session on the New York Stock Exchange (ordinarily 400 pm Eastern
Time) (the ldquoClosing Timerdquo) in each case on the date such order is placed in order for the
creation of Creation Units to be effected based on the NAV of Shares as next determined
on such date after receipt of the order in proper form Shares may be redeemed only in
Creation Units at their NAV next determined after receipt not later than the Closing Time
of a redemption request in proper form by the Fund through the transfer agent and only
on a business day
The Fundrsquos custodian through the National Securities Clearing Corporation will
make available on each business day prior to the opening of business of the Exchange
the list of the names and quantities of the instruments comprising the Creation Basket as
well as the estimated Cash Component (if any) for that day The published Creation
Basket will apply until a new Creation Basket is announced on the following business
day prior to commencement of trading in the Shares
SR-NASDAQ-2015-011 Amendment No 2 Page 46 of 64
Net Asset Value
The Fundrsquos NAV will be determined as of the close of trading (normally
400 pm Eastern Time) on each day the New York Stock Exchange is open for
business NAV will be calculated for the Fund by taking the market price of the Fundrsquos
total assets including interest or dividends accrued but not yet collected less all
liabilities and dividing such amount by the total number of Shares outstanding The
result rounded to the nearest cent will be the NAV per Share All valuations will be
subject to review by the Board of Trustees of the Trust (ldquoTrust Boardrdquo) or its delegate
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with valuation procedures (which may be revised from time to time) adopted by the Trust
Board (the ldquoValuation Proceduresrdquo) and in accordance with the 1940 Act A market
valuation generally means a valuation (i) obtained from an exchange an independent
pricing service (ldquoPricing Servicerdquo) or a major market maker (or dealer) or (ii) based on a
price quotation or other equivalent indication of value supplied by an exchange a Pricing
Service or a major market maker (or dealer) The information summarized below is
based on the Valuation Procedures as currently in effect however as noted above the
Valuation Procedures are amended from time to time and therefore such information is
subject to change
Certain securities including Floating Rate Debt Instruments in which the Fund
may invest will not be listed on any securities exchange or board of trade Such
securities will typically be bought and sold by institutional investors in individually
negotiated private transactions that function in many respects like an over-the-counter
SR-NASDAQ-2015-011 Amendment No 2 Page 47 of 64
secondary market although typically no formal market makers will exist Certain
securities particularly debt securities will have few or no trades or trade infrequently
and information regarding a specific security may not be widely available or may be
incomplete Accordingly determinations of the fair value of debt securities may be
based on infrequent and dated information Because there is less reliable objective data
available elements of judgment may play a greater role in valuation of debt securities
than for other types of securities Typically Floating Rate Debt Instruments and other
debt securities in which the Fund may invest (other than those described below) will be
valued using information provided by a Pricing Service Debt securities having a
remaining maturity of 60 days or less when purchased will be valued at cost adjusted for
amortization of premiums and accretion of discounts provided the Adviserrsquos pricing
committee (the ldquoPricing Committeerdquo) has determined that the use of amortized cost is an
appropriate reflection of fair value given market and issuer-specific conditions existing at
the time of the determination Overnight repurchase agreements will be valued at cost
and term repurchase agreements (ie those whose maturity exceeds seven days) will be
valued at the average of the bid quotations obtained daily from at least two recognized
dealers
Asset-backed and mortgage-backed securities will generally be valued by using a
Pricing Service If a Pricing Service does not cover a particular asset-backed or
mortgage-backed security or discontinues covering a particular asset-backed or
mortgage-backed security the security will be priced using broker quotes generally
provided by brokers that make or participate in markets in the security To derive values
Pricing Services and broker-dealers may use matrix pricing and valuation models as well
SR-NASDAQ-2015-011 Amendment No 2 Page 48 of 64
as recent market transactions for the same or similar assets As it deems appropriate the
Pricing Committee may determine that a Pricing Service price does not represent an
accurate value of an asset-backed or mortgage-backed security based on broker quotes it
receives a recent trade in the security by the Fund information from a portfolio manager
or other market information In the event that the Pricing Committee determines that the
Pricing Service price is unreliable or inaccurate based on such other information broker
quotes may be used Additionally if the Pricing Committee determines that the price of
an asset-backed or mortgage-backed security obtained from a Pricing Service and
available broker quotes is unreliable or inaccurate due to market conditions or other
reasons or if a Pricing Service price or broker quote is unavailable the security will be
valued using fair value pricing as described below
Equity securities listed on any exchange other than the Exchange will be valued at
the last sale price on the exchange on which they are principally traded on the business
day as of which such value is being determined Equity securities listed on the Exchange
will be valued at the official closing price on the business day as of which such value is
being determined If there has been no sale on such day or no official closing price in
the case of securities traded on the Exchange the securities will be valued using fair
value pricing as described below Equity securities traded on more than one securities
exchange will be valued at the last sale price or official closing price as applicable on
the business day as of which such value is being determined at the close of the exchange
representing the principal market for such securities
Exchange-traded options and futures contracts will be valued at the closing price
in the market where such contracts are principally traded
SR-NASDAQ-2015-011 Amendment No 2 Page 49 of 64
Certain securities including Floating Rate Debt Instruments in which the Fund
will invest will not be able to be priced by pre-established pricing methods Such
securities may be valued by the Trust Board or its delegate at fair value The use of fair
value pricing by the Fund will be governed by the Valuation Procedures and conducted in
accordance with the provisions of the 1940 Act Valuing the Fundrsquos securities using fair
value pricing will result in using prices for those securities that may differ from current
market valuations or official closing prices on the applicable exchange
Availability of Information
The Fundrsquos website (wwwftportfolioscom) which will be publicly available
prior to the public offering of Shares will include a form of the prospectus for the Fund
that may be downloaded The website will include the Sharesrsquo ticker CUSIP and
exchange information along with additional quantitative information updated on a daily
basis including for the Fund (1) daily trading volume the prior business dayrsquos reported
NAV and closing price mid-point of the bidask spread at the time of calculation of such
NAV (the ldquoBidAsk Pricerdquo)33 and a calculation of the premium and discount of the
BidAsk Price against the NAV and (2) data in chart format displaying the frequency
distribution of discounts and premiums of the daily BidAsk Price against the NAV
within appropriate ranges for each of the four previous calendar quarters On each
business day before commencement of trading in Shares in the Regular Market Session34
33 The BidAsk Price of the Fund will be determined using the mid-point of the highest bid and the lowest offer on the Exchange as of the time of calculation of the Fundrsquos NAV The records relating to BidAsk Prices will be retained by the Fund and its service providers
34 See Nasdaq Rule 4120(b)(4) (describing the three trading sessions on the Exchange (1) Pre-Market Session from 4 am to 930 am Eastern Time (2)
SR-NASDAQ-2015-011 Amendment No 2 Page 50 of 64
on the Exchange the Fund will disclose on its website the identities and quantities of the
portfolio of securities and other assets (the ldquoDisclosed Portfoliordquo as defined in Nasdaq
Rule 5735(c)(2)) held by the Fund that will form the basis for the Fundrsquos calculation of
NAV at the end of the business day 35 The Fundrsquos disclosure of derivative positions in
the Disclosed Portfolio will include information that market participants can use to value
these positions intraday On a daily basis the Fund will disclose on the Fundrsquos website
the following information regarding each portfolio holding as applicable to the type of
holding ticker symbol CUSIP number or other identifier if any a description of the
holding (including the type of holding) the identity of the security or other asset or
instrument underlying the holding if any for options the option strike price quantity
held (as measured by for example par value notional value or number of shares
contracts or units) maturity date if any coupon rate if any effective date if any market
value of the holding and percentage weighting of the holding in the Fundrsquos portfolio
The website information will be publicly available at no charge
In addition for the Fund an estimated value defined in Rule 5735(c)(3) as the
ldquoIntraday Indicative Valuerdquo that reflects an estimated intraday value of the Fundrsquos
Disclosed Portfolio will be disseminated Moreover the Intraday Indicative Value
Regular Market Session from 930 am to 4 pm or 415 pm Eastern Time and (3) Post-Market Session from 4 pm or 415 pm to 8 pm Eastern Time)
Under accounting procedures to be followed by the Fund trades made on the prior business day (ldquoTrdquo) will be booked and reflected in NAV on the current business day (ldquoT+1rdquo) Accordingly the Fund will be able to disclose at the beginning of the business day the portfolio that will form the basis for the NAV calculation at the end of the business day
35
SR-NASDAQ-2015-011 Amendment No 2 Page 51 of 64
available on the NASDAQ OMX Information LLC proprietary index data service36 will
be based upon the current value for the components of the Disclosed Portfolio and will be
updated and widely disseminated by one or more major market data vendors and broadly
displayed at least every 15 seconds during the Regular Market Session The Intraday
Indicative Value will be based on quotes and closing prices from the securitiesrsquo local
market and may not reflect events that occur subsequent to the local marketrsquos close
Premiums and discounts between the Intraday Indicative Value and the market price may
occur This should not be viewed as a ldquoreal timerdquo update of the NAV per Share of the
Fund which is calculated only once a day
The dissemination of the Intraday Indicative Value together with the Disclosed
Portfolio will allow investors to determine the value of the underlying portfolio of the
Fund on a daily basis and will provide a close estimate of that value throughout the
trading day
Investors will also be able to obtain the Fundrsquos Statement of Additional
Information (ldquoSAIrdquo) the Fundrsquos annual and semi-annual reports (together ldquoShareholder
Reportsrdquo) and its Form N-CSR and Form N-SAR filed twice a year The Fundrsquos SAI
and Shareholder Reports will be available free upon request from the Fund and those
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or
downloaded from the Commissionrsquos website at wwwsecgov Information regarding
Currently the NASDAQ OMX Global Index Data Service (ldquoGIDSrdquo) is the NASDAQ OMX global index data feed service offering real-time updates daily summary messages and access to widely followed indexes and Intraday Indicative Values for ETFs GIDS provides investment professionals with the daily information needed to track or trade NASDAQ OMX indexes listed ETFs or third-party partner indexes and ETFs
36
SR-NASDAQ-2015-011 Amendment No 2 Page 52 of 64
market price and trading volume of the Shares will be continually available on a real-time
basis throughout the day on brokersrsquo computer screens and other electronic services
Information regarding the previous dayrsquos closing price and trading volume information
for the Shares will be published daily in the financial section of newspapers Quotation
and last sale information for the Shares will be available via Nasdaq proprietary quote
and trade services as well as in accordance with the Unlisted Trading Privileges and the
Consolidated Tape Association (ldquoCTArdquo) plans for the Shares Quotation and last sale
information for the other ETFs in which the Fund will invest will be available via the
quote and trade services of their respective primary exchanges as well as in accordance
with the Unlisted Trading Privileges and the CTA plans as applicable Quotation and
last sale information for US exchange-traded options will be available via the Options
Price Reporting Authority Intraday executable price quotations on Floating Rate Debt
Instruments and other assets not traded on an exchange will be available from major
broker-dealer firms or market data vendors as well as from automated quotation systems
published or other public sources or online information services Additionally the Trade
Reporting and Compliance Engine (ldquoTRACErdquo) of the Financial Industry Regulatory
Authority (ldquoFINRArdquo) will be a source of price information for corporate bonds
privately-issued securities mortgage-backed securities and asset-backed securities to the
extent transactions in such securities are reported to TRACE37 For exchange-traded
Broker-dealers that are FINRA member firms have an obligation to report transactions in specified debt securities to TRACE to the extent required under applicable FINRA rules Generally such debt securities will have at issuance a maturity that exceeds one calendar year
37
SR-NASDAQ-2015-011 Amendment No 2 Page 53 of 64
assets intraday pricing information will be available directly from the applicable listing
exchange
Additional information regarding the Fund and the Shares including investment
strategies risks creation and redemption procedures fees Fund holdings disclosure
policies distributions and taxes will be included in the Registration Statement
Initial and Continued Listing
The Shares will be subject to Rule 5735 which sets forth the initial and continued
listing criteria applicable to Managed Fund Shares The Exchange represents that for
initial andor continued listing the Fund must be in compliance with Rule 10A-338 under
the Act A minimum of 100000 Shares will be outstanding at the commencement of
trading on the Exchange The Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the NAV and the
Disclosed Portfolio will be made available to all market participants at the same time
Trading Halts
With respect to trading halts the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading in the Shares of the Fund Nasdaq will
halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12) Trading may be
halted because of market conditions or for reasons that in the view of the Exchange
make trading in the Shares inadvisable These may include (1) the extent to which
trading is not occurring in the securities andor the other assets constituting the Disclosed
Portfolio of the Fund or (2) whether other unusual conditions or circumstances
See 17 CFR 24010A-3 38
SR-NASDAQ-2015-011 Amendment No 2 Page 54 of 64
detrimental to the maintenance of a fair and orderly market are present Trading in the
Shares also will be subject to Rule 5735(d)(2)(D) which sets forth circumstances under
which Shares of the Fund may be halted
Trading Rules
Nasdaq deems the Shares to be equity securities thus rendering trading in the
Shares subject to Nasdaqrsquos existing rules governing the trading of equity securities
Nasdaq will allow trading in the Shares from 400 am until 800 pm Eastern Time
The Exchange has appropriate rules to facilitate transactions in the Shares during all
trading sessions As provided in Nasdaq Rule 5735(b)(3) the minimum price variation
for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $001
Surveillance
The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws39 The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities laws
The surveillances referred to above generally focus on detecting securities trading
outside their normal patterns which could be indicative of manipulative or other violative
activity When such situations are detected surveillance analysis follows and
FINRA surveils trading on the Exchange pursuant to a regulatory services agreement The Exchange is responsible for FINRArsquos performance under this regulatory services agreement
39
SR-NASDAQ-2015-011 Amendment No 2 Page 55 of 64
investigations are opened where appropriate to review the behavior of all relevant
parties for all relevant trading violations
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 56 of 64
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
SR-NASDAQ-2015-011 Amendment No 2 Page 57 of 64
2 Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
SR-NASDAQ-2015-011 Amendment No 2 Page 58 of 64
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
SR-NASDAQ-2015-011 Amendment No 2 Page 59 of 64
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
SR-NASDAQ-2015-011 Amendment No 2 Page 60 of 64
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 61 of 64
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
SR-NASDAQ-2015-011 Amendment No 2 Page 62 of 64
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
B Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
C Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received From Members Participants or Others
Written comments were neither solicited nor received
III Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Within 45 days of the date of publication of this notice in the Federal Register or
within such longer period (i) as the Commission may designate up to 90 days of such date
if it finds such longer period to be appropriate and publishes its reasons for so finding or
(ii) as to which the Exchange consents the Commission shall (a) by order approve or
disapprove such proposed rule change or (b) institute proceedings to determine whether
the proposed rule change should be disapproved
SR-NASDAQ-2015-011 Amendment No 2 Page 63 of 64
IV Solicitation of Comments
Interested persons are invited to submit written data views and arguments
concerning the foregoing including whether the proposed rule change is consistent with
the Act Comments may be submitted by any of the following methods
Electronic comments
bull Use the Commissionrsquos Internet comment form
(httpwwwsecgovrulessroshtml) or
bull Send an e-mail to rule-commentssecgov Please include File Number
SR-NASDAQ-2015-011 on the subject line
Paper comments
bull Send paper comments in triplicate to Brent J Fields Secretary Securities and
Exchange Commission Station Place 100 F Street NE Washington DC
20549-9303
All submissions should refer to File Number SR-NASDAQ-2015-011 This file number
should be included on the subject line if e-mail is used To help the Commission process
and review your comments more efficiently please use only one method The
Commission will post all comments on the Commissionrsquos Internet website
httpwwwsecgovrulessroshtml
Copies of the submission all subsequent amendments all written statements with
respect to the proposed rule change that are filed with the Commission and all written
communications relating to the proposed rule change between the Commission and any
person other than those that may be withheld from the public in accordance with the
provisions of 5 USC 552 will be available for website viewing and printing in the
Commissionrsquos Public Reference Room 100 F Street NE Washington DC 20549 on
SR-NASDAQ-2015-011 Amendment No 2 Page 64 of 64
official business days between the hours of 1000 am and 300 pm Copies of the filing
also will be available for inspection and copying at the principal office of Nasdaq All
comments received will be posted without change the Commission does not edit
personal identifying information from submissions You should submit only information
that you wish to make available publicly
All submissions should refer to File Number SR-NASDAQ-2015-011 and should
be submitted on or before [insert date 21 days from publication in the Federal Register]
For the Commission by the Division of Trading and Markets pursuant to
delegated authority41
Kevin M OrsquoNeill Deputy Secretary
17 CFR 20030-3(a)(12) 41
SR-NASDAQ-2015-011 Amendment No 2 Page 29 of 64
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
SR-NASDAQ-2015-011 Amendment No 2 Page 30 of 64
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
SR-NASDAQ-2015-011 Amendment No 2 Page 31 of 64
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
4 Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
5 Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received from Members Participants or Others
Written comments were neither solicited nor received
6 Extension of Time Period for Commission Action
The Exchange does not consent at this time to an extension of any time period for
Commission action
7 Basis for Summary Effectiveness Pursuant to Section 19(b)(3) or for Accelerated Effectiveness Pursuant to Section 19(b)(2)
Not applicable
8 Proposed Rule Change Based on Rules of Another Self-Regulatory Organization or of the Commission
Not applicable
9 Security-Based Swap Submissions Filed Pursuant to Section 3C of the Act
Not applicable
SR-NASDAQ-2015-011 Amendment No 2 Page 32 of 64
10 Advance Notices Filed Pursuant to Section 806(e) of the Payment Clearing and Settlement Supervision Act
Not applicable
11 Exhibits
1 Completed notice of proposed rule change for publication in the Federal
Register
SR-NASDAQ-2015-011 Amendment No 2 Page 33 of 64
EXHIBIT 1
SECURITIES AND EXCHANGE COMMISSION (Release No 34shy File No SR-NASDAQ-2015-011)
April __ 2015
Self-Regulatory Organizations The NASDAQ Stock Market LLC Notice of Filing of Proposed Rule Change Relating to the Listing and Trading of the Shares of the First Trust Strategic Floating Rate ETF of First Trust Exchange-Traded Fund IV
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (ldquoActrdquo)1 and
Rule 19b-4 thereunder2 notice is hereby given that on February 12 2015 The NASDAQ
Stock Market LLC (ldquoNasdaqrdquo or the ldquoExchangerdquo) filed with the Securities and Exchange
Commission (ldquoCommissionrdquo) the proposed rule change as described in in Items I II and
III below which Items have been prepared by Nasdaq On April 6 2015 Nasdaq filed
Amendment No 1 which replaced the text of the original filing in its entirety On April
15 2015 Nasdaq filed Amendment No 2 which replaced the text of the original filing in
its entirety The Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons
I Self-Regulatory Organizationrsquos Statement of the Terms of Substance of the Proposed Rule Change
Nasdaq proposes to list and trade the shares of the First Trust Strategic Floating
Rate ETF (the ldquoFundrdquo) of the First Trust Strategic Floating Rate ETF (the ldquoFundrdquo) of
First Trust Exchange-Traded Fund IV (the ldquoTrustrdquo) under Nasdaq Rule 5735 (ldquoManaged
1 15 USC 78s(b)(1)
2 17 CFR 24019b-4
SR-NASDAQ-2015-011 Amendment No 2 Page 34 of 64
Fund Sharesrdquo)3 The shares of the Fund are collectively referred to herein as the
ldquoSharesrdquo
The text of the proposed rule change is available at
httpnasdaqcchwallstreetcom at Nasdaqrsquos principal office and at the Commissionrsquos
Public Reference Room
II Self-Regulatory Organizationrsquos Statement of the Purpose of and Statutory Basis for the Proposed Rule Change
In its filing with the Commission Nasdaq included statements concerning the
purpose of and basis for the proposed rule change The text of these statements may be
examined at the places specified in Item IV below Nasdaq has prepared summaries set
forth in Sections A B and C below of the most significant aspects of such statements
A Self-Regulatory Organizationrsquos Statement of the Purpose of and Statutory Basis for the Proposed Rule Change
1 Purpose
The Exchange proposes to list and trade the Shares of the Fund under Nasdaq
Rule 5735 which governs the listing and trading of Managed Fund Shares4 on the
3 The Commission approved Nasdaq Rule 5735 in Securities Exchange Act Release No 57962 (June 13 2008) 73 FR 35175 (June 20 2008) (SR-NASDAQ-2008shy039) There are already multiple actively-managed funds listed on the Exchange see eg Securities Exchange Act Release Nos 69464 (April 26 2013) 78 FR 25774 (May 2 2013) (SR-NASDAQ-2013-036) (order approving listing and trading of First Trust Senior Loan Fund) 68972 (February 22 2013) 78 FR 13721 (February 28 2013) (SR-NASDAQ-2012-147) (order approving listing and trading of First Trust High Yield LongShort ETF) 66489 (February 29 2012) 77 FR 13379 (March 6 2012) (SR-NASDAQ-2012-004) (order approving listing and trading of WisdomTree Emerging Markets Corporate Bond Fund) The Exchange believes the proposed rule change raises no significant issues not previously addressed in those prior Commission orders
4 A Managed Fund Share is a security that represents an interest in an investment company registered under the Investment Company Act of 1940 (15 USC 80ashy
SR-NASDAQ-2015-011 Amendment No 2 Page 35 of 64
Exchange The Fund will be an actively-managed exchange-traded fund (ldquoETFrdquo) The
Shares will be offered by the Trust which was established as a Massachusetts business
trust on September 15 20105 The Trust is registered with the Commission as an
investment company and has filed a registration statement on Form N-1A (ldquoRegistration
Statementrdquo) with the Commission6 The Fund will be a series of the Trust The Fund
intends to qualify each year as a regulated investment company (ldquoRICrdquo) under
Subchapter M of the Internal Revenue Code of 1986 as amended
First Trust Advisors LP will be the investment adviser (ldquoAdviserrdquo) to the Fund
First Trust Portfolios LP (the ldquoDistributorrdquo) will be the principal underwriter and
distributor of the Fundrsquos Shares The Bank of New York Mellon Corporation (ldquoBNYrdquo)
will act as the administrator accounting agent custodian and transfer agent to the Fund
1) (the ldquo1940 Actrdquo) organized as an open-end investment company or similar entity that invests in a portfolio of securities selected by its investment adviser consistent with its investment objectives and policies In contrast an open-end investment company that issues Index Fund Shares listed and traded on the Exchange under Nasdaq Rule 5705 seeks to provide investment results that correspond generally to the price and yield performance of a specific foreign or domestic stock index fixed income securities index or combination thereof
5 The Commission has issued an order upon which the Trust may rely granting certain exemptive relief under the 1940 Act See Investment Company Act Release No 30029 (April 10 2012) (File No 812-13795) (the ldquoExemptive Reliefrdquo) In addition the Commission has issued no-action relief upon which the Trust may rely pertaining to the Fundrsquos ability to invest in derivatives notwithstanding certain representations in the application for the Exemptive Relief See Commission No-Action Letter (December 6 2012)
6 See Post-Effective Amendment No 104 to Registration Statement on Form N-1A for the Trust dated January 29 2015 (File Nos 333-174332 and 811-22559) The descriptions of the Fund and the Shares contained herein are based in part on information in the Registration Statement
7
SR-NASDAQ-2015-011 Amendment No 2 Page 36 of 64
Paragraph (g) of Rule 5735 provides that if the investment adviser to the
investment company issuing Managed Fund Shares is affiliated with a broker-dealer
such investment adviser shall erect a ldquofire wallrdquo between the investment adviser and the
broker-dealer with respect to access to information concerning the composition andor
changes to such investment company portfolio7 In addition paragraph (g) further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio Rule 5735(g) is similar
to Nasdaq Rule 5705(b)(5)(A)(i) however paragraph (g) in connection with the
establishment of a ldquofire wallrdquo between the investment adviser and the broker-dealer
reflects the applicable open-end fundrsquos portfolio not an underlying benchmark index as
is the case with index-based funds The Adviser is not a broker-dealer although it is
affiliated with the Distributor a broker-dealer The Adviser has implemented a fire wall
An investment adviser to an open-end fund is required to be registered under the Investment Advisers Act of 1940 (the ldquoAdvisers Actrdquo) As a result the Adviser and its related personnel are subject to the provisions of Rule 204A-1 under the Advisers Act relating to codes of ethics This Rule requires investment advisers to adopt a code of ethics that reflects the fiduciary nature of the relationship to clients as well as compliance with other applicable securities laws Accordingly procedures designed to prevent the communication and misuse of non-public information by an investment adviser must be consistent with Rule 204A-1 under the Advisers Act In addition Rule 206(4)-7 under the Advisers Act makes it unlawful for an investment adviser to provide investment advice to clients unless such investment adviser has (i) adopted and implemented written policies and procedures reasonably designed to prevent violation by the investment adviser and its supervised persons of the Advisers Act and the Commission rules adopted thereunder (ii) implemented at a minimum an annual review regarding the adequacy of the policies and procedures established pursuant to subparagraph (i) above and the effectiveness of their implementation and (iii) designated an individual (who is a supervised person) responsible for administering the policies and procedures adopted under subparagraph (i) above
8
SR-NASDAQ-2015-011 Amendment No 2 Page 37 of 64
with respect to its broker-dealer affiliate regarding access to information concerning the
composition andor changes to the portfolio In addition personnel who make decisions
on the Fundrsquos portfolio composition will be subject to procedures designed to prevent the
use and dissemination of material non-public information regarding the Fundrsquos portfolio
In the event (a) the Adviser becomes or becomes newly affiliated with a broker-dealer
or (b) any new adviser or sub-adviser is a registered broker-dealer or becomes affiliated
with another broker-dealer it will implement a fire wall with respect to its relevant
personnel andor such broker-dealer affiliate as applicable regarding access to
information concerning the composition andor changes to the portfolio and will be
subject to procedures designed to prevent the use and dissemination of material
non-public information regarding such portfolio The Fund does not currently intend to
use a sub-adviser
First Trust Strategic Floating Rate ETF
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions8 at least 80 of its
The term ldquounder normal market conditionsrdquo as used herein includes but is not limited to the absence of adverse market economic political or other conditions including extreme volatility or trading halts in the fixed income markets or the financial markets generally operational issues causing dissemination of inaccurate market information or force majeure type events such as systems failure natural or man-made disaster act of God armed conflict act of terrorism riot or labor disruption or any similar intervening circumstance For temporary defensive purposes during the initial invest-up period and during periods of high cash inflows or outflows the Fund may depart from its principal investment strategies for example it may hold a higher than normal proportion of its assets in cash During such periods the Fund may not be able to achieve its investment objective The Fund may adopt a defensive strategy when the Adviser believes securities in which the Fund normally invests have elevated risks due to political or economic factors and in other extraordinary circumstances
SR-NASDAQ-2015-011 Amendment No 2 Page 38 of 64
net assets in a portfolio of the following types of floating-rate9 debt instruments issued by
US and non-US public- and private-sector entities floating-rate corporate10 and
government bonds and notes floating-rate agency securities 11 floating-rate instruments
of non-US issuers floating-rate privately-issued securities 12 floating-rate asset-backed
securities 13 floating-rate mortgage-backed securities14 floating-rate loans 15 and
9 For the avoidance of doubt the term ldquofloating-raterdquo shall also include similar terms such as ldquovariable-raterdquo and ldquoadjustable-raterdquo
10 The Adviser expects that under normal market conditions generally for a corporate bond to be considered as an eligible investment after taking into account such an investment at least 75 of the Fundrsquos net assets that are invested in floating-rate corporate bonds and as described below fixed-rate corporate bonds (in the aggregate) will be comprised of corporate bonds that have at the time of original issuance $100 million or more par amount outstanding
11 ldquoAgency securitiesrdquo for these purposes generally includes securities issued by the following entities Government National Mortgage Association (Ginnie Mae) Federal National Mortgage Association (Fannie Mae) Federal Home Loan Banks (FHLBanks) Federal Home Loan Mortgage Corporation (Freddie Mac) Farm Credit System (FCS) Farm Credit Banks (FCBanks) Student Loan Marketing Association (Sallie Mae) Resolution Funding Corporation (REFCORP) Financing Corporation (FICO) and the Farm Credit System (FCS) Financial Assistance Corporation (FAC) Agency securities can include but are not limited to mortgage-backed securities
12 ldquoPrivately-issued securitiesrdquo for these purposes generally includes Rule 144A securities other than mortgage-backed Rule 144A securities Under normal market conditions privately-issued securities will have at the time of original issuance $100 million or more principal amount outstanding to be considered eligible investments
13 Asset-backed securities are securities that are backed by a pool of assets The Fund currently intends to invest in asset-backed securities that are consumer asset-backed securities
14 Mortgage-backed securities which are securities that directly or indirectly represent a participation in or are secured by and payable from mortgage loans on real property will consist of (1) residential mortgage-backed securities (ldquoRMBSrdquo) (2) commercial mortgage-backed securities (ldquoCMBSrdquo) (3) stripped mortgage-backed securities (ldquoSMBSrdquo) which are mortgage-backed securities
SR-NASDAQ-2015-011 Amendment No 2 Page 39 of 64
investment companies16 (including investment companies advised by the Adviser) that
invest primarily in the foregoing types of debt instruments17 (collectively ldquoFloating Rate
Debt Instrumentsrdquo)
where mortgage payments are divided between paying the loanrsquos principal and paying the loanrsquos interest (4) collateralized mortgage obligations (ldquoCMOsrdquo) and real estate mortgage investment conduits (ldquoREMICsrdquo) which are mortgage-backed securities that are divided into multiple classes with each class being entitled to a different share of the principal and interest payments received from the pool of underlying assets
15 The floating-rate loans in which the Fund will invest will represent amounts borrowed by companies or other entities from banks and other lenders and a significant portion of such floating-rate loans may be rated below investment grade or unrated Floating-rate loans held by the Fund may be senior or subordinate obligations of the borrower and may or may not be secured by collateral First lien senior secured floating-rate loans are referred to herein as ldquosenior loansrdquo Floating-rate loans that are not senior loans (ie unsecured floating-rate loans and secured floating-rate loans that are not first lien floating-rate loans) are referred to herein as ldquojunior loansrdquo The Fund will generally invest in floating-rate loans that the Adviser deems to be liquid with readily available prices notwithstanding the foregoing the Fund may invest in floating-rate loans that are deemed illiquid so long as the Fund complies with the 15 limitation on investments of its net assets in illiquid assets described below under ldquoInvestment Restrictionsrdquo
16 The Fund currently anticipates investing only in registered open-end investment companies that are listed and traded in the US on registered exchanges (ie other ETFs) An ETF is an investment company registered under the 1940 Act that holds a portfolio of securities Many ETFs are designed to track the performance of a securities index including industry sector country and region indexes The Fund may invest in the securities of ETFs in excess of the limits imposed under the 1940 Act pursuant to exemptive orders obtained by other ETFs and their sponsors from the Commission In addition the Fund may invest in the securities of certain investment companies in excess of the limits imposed under the 1940 Act pursuant to an exemptive order obtained by the Trust and the Adviser from the Commission See Investment Company Act Release No 30377 (February 5 2013) (File No 812-13895) The ETFs in which the Fund may invest include Index Fund Shares (as described in Nasdaq Rule 5705) Portfolio Depository Receipts (as described in Nasdaq Rule 5705) and Managed Fund Shares (as described in Nasdaq Rule 5735) While the Fund may invest in inverse ETFs the Fund will not invest in leveraged or inverse leveraged (eg 2X or -3X) ETFs
SR-NASDAQ-2015-011 Amendment No 2 Page 40 of 64
At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade To be considered
ldquoinvestment graderdquo under normal market conditions rated Floating Rate Debt
Instruments will carry at the time of purchase a rating in the highest four rating
categories of at least one nationally recognized statistical ratings organization
(ldquoNRSROrdquo) (eg BBB- or higher by Standard amp Poorrsquos Ratings Services (ldquoSampPrdquo)
andor Fitch Ratings (ldquoFitchrdquo) or Baa3 or higher by Moodyrsquos Investors Service Inc
(ldquoMoodyrsquosrdquo)18 For unrated securities to be considered ldquoinvestment graderdquo under normal
market conditions such securities will be determined at the time of purchase to be of
comparable quality19 by the Adviser The Fund may invest up to 35 of its net assets in
securities that are at the time of investment rated below investment grade by each
NRSRO rating such securities (or securities that are unrated and determined by the
17 The liquidity of a security especially in the case of asset-backed and mortgage-backed securities will be a substantial factor in the Fundrsquos security selection process Consistent with the discussion below under ldquoInvestment Restrictionsrdquo the Fund will not purchase any Floating Rate Debt Instruments (including asset-backed securities and mortgage-backed securities) that in the Adviserrsquos opinion are illiquid if as a result more than 15 of the value of the Fundrsquos net assets will be invested in illiquid assets
18 For the avoidance of doubt if a security is rated by multiple NRSROs and receives different ratings the Fund will treat the security as being rated in the highest rating category received from an NRSRO
19 Comparable quality of unrated securities will be determined by the Adviser based on fundamental credit analysis of the unrated security and comparable NRSRO-rated securities On a best efforts basis the Adviser will attempt to make a rating determination based on publicly available data In making a ldquocomparable qualityrdquo determination the Adviser may consider for example whether the issuer of the security has issued other rated securities the nature and provisions of the relevant security whether the obligations under the relevant security are guaranteed by another entity and the rating of such guarantor (if any) relevant cash flows macroeconomic analysis andor sector or industry analysis
SR-NASDAQ-2015-011 Amendment No 2 Page 41 of 64
Adviser to be of comparable quality) commonly referred to as ldquohigh yieldrdquo or ldquojunkrdquo
bonds If subsequent to purchase by the Fund a security held by the Fund experiences a
decline in credit quality and falls below investment grade the Fund may continue to hold
the security and it will not cause the Fund to violate the 35 investment limitation
however the security will be taken into account for purposes of determining whether
purchases of additional securities will cause the Fund to violate such limitation
The Fund will limit its investments in asset-backed securities (excluding agency
mortgage-backed securities) and non-agency mortgage-backed securities (in the
aggregate) to 20 of its net assets20 In addition the Fund will limit its investments in
junior loans to 20 of its net assets
The Fund will hold debt securities (including in the aggregate Floating Rate
Debt Instruments and the fixed-rate debt securities described below) of at least 13
non-affiliated issuers
Other Investments
Under normal market conditions the Fund will invest primarily in the Floating
Rate Debt Instruments described above to meet its investment objective In addition the
Fund may invest up to 20 of its net assets in the following types of fixed-rate debt
securities corporate21 and government bonds and notes agency securities22 instruments
20 For the avoidance of doubt there is no limitation on the Fundrsquos investments in agency mortgage-backed securities
21 See footnote 10 above
22 See footnote 11 above
SR-NASDAQ-2015-011 Amendment No 2 Page 42 of 64
of non-US issuers in developed markets privately-issued securities 23 asset-backed
securities 24 mortgage-backed securities 25 municipal bonds money market securities26
and investment companies27 (including investment companies advised by the Adviser)
that invest primarily in the foregoing types of debt securities
Further to pursue its investment objective the Fund may invest up to 20 of the
value of its net assets in exchange-listed options on US Treasury futures contracts and
exchange-listed US Treasury futures contracts28 The use of these derivative
transactions may allow the Fund to obtain net long or short exposures to selected interest
rates These derivatives may also be used to hedge risks including interest rate risks and
credit risks associated with the Fundrsquos portfolio investments The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
23 See footnote 12 above
24 See footnote 13 above
25 See footnote 14 above
26 ldquoMoney market securitiesrdquo for these purposes generally includes short-term high-quality obligations issued or guaranteed by the US Treasury or the agencies or instrumentalities of the US government short-term high-quality securities issued or guaranteed by non-US governments agencies and instrumentalities repurchase agreements commercial paper (both asset-backed and non-assetshybacked) and deposits and other obligations of US and non-US banks and financial institutions
27 See footnote 16 above
28 At least 90 of the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be invested in instruments that trade in markets that are members of the Intermarket Surveillance Group (ldquoISGrdquo) (see footnote 40 below) or are parties to a comprehensive surveillance sharing agreement with the Exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 43 of 64
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index
Investment Restrictions
The Fund will not invest 25 or more of the value of its total assets in securities
of issuers in any one industry This restriction does not apply to (a) obligations issued or
guaranteed by the US government its agencies or instrumentalities or (b) securities of
other investment companies29
The Fund may hold up to an aggregate amount of 15 of its net assets in illiquid
assets (calculated at the time of investment) including Rule 144A securities deemed
illiquid by the Adviser30 The Fund will monitor its portfolio liquidity on an ongoing
basis to determine whether in light of current circumstances an adequate level of
liquidity is being maintained and will consider taking appropriate steps in order to
maintain adequate liquidity if through a change in values net assets or other
circumstances more than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid
assets include securities subject to contractual or other restrictions on resale and other
29 See Form N-1A Item 9 The Commission has taken the position that a fund is concentrated if it invests more than 25 of the value of its total assets in any one industry See eg Investment Company Act Release No 9011 (October 30 1975) 40 FR 54241 (November 21 1975)
30 In reaching liquidity decisions the Adviser may consider the following factors the frequency of trades and quotes for the security the number of dealers wishing to purchase or sell the security and the number of other potential purchasers dealer undertakings to make a market in the security and the nature of the security and the nature of the marketplace in which it trades (eg the time needed to dispose of the security the method of soliciting offers and the mechanics of transfer)
SR-NASDAQ-2015-011 Amendment No 2 Page 44 of 64
instruments that lack readily available markets as determined in accordance with
Commission staff guidance31
The Fund will not invest in non-US equity securities
Creation and Redemption of Shares
The Fund will issue and redeem Shares on a continuous basis at net asset value
(ldquoNAVrdquo)32 only in large blocks of Shares (ldquoCreation Unitsrdquo) in transactions with
authorized participants generally including broker-dealers and large institutional
investors (ldquoAuthorized Participantsrdquo) Creation Units generally will consist of 50000
Shares although this may change from time to time Creation Units however are not
expected to consist of less than 50000 Shares As described in the Registration
Statement and consistent with the Exemptive Relief the Fund will issue and redeem
Creation Units in exchange for an in-kind portfolio of instruments andor cash in lieu of
31 The Commission has stated that long-standing Commission guidelines have required open-end funds to hold no more than 15 of their net assets in illiquid securities and other illiquid assets See Investment Company Act Release No 28193 (March 11 2008) 73 FR 14618 (March 18 2008) footnote 34 See also Investment Company Act Release No 5847 (October 21 1969) 35 FR 19989 (December 31 1970) (Statement Regarding ldquoRestricted Securitiesrdquo) Investment Company Act Release No 18612 (March 12 1992) 57 FR 9828 (March 20 1992) (Revisions of Guidelines to Form N-1A) A fundrsquos portfolio security is illiquid if it cannot be disposed of in the ordinary course of business within seven days at approximately the value ascribed to it by the fund See Investment Company Act Release No 14983 (March 12 1986) 51 FR 9773 (March 21 1986) (adopting amendments to Rule 2a-7 under the 1940 Act) Investment Company Act Release No 17452 (April 23 1990) 55 FR 17933 (April 30 1990) (adopting Rule 144A under the Securities Act of 1933)
32 The NAV of the Fundrsquos Shares generally will be calculated once daily Monday through Friday as of the close of regular trading on the New York Stock Exchange generally 400 pm Eastern Time (the ldquoNAV Calculation Timerdquo) NAV per Share will be calculated by dividing the Fundrsquos net assets by the number of Fund Shares outstanding For more information regarding the valuation of Fund investments in calculating the Fundrsquos NAV see the Registration Statement
SR-NASDAQ-2015-011 Amendment No 2 Page 45 of 64
such instruments (the ldquoCreation Basketrdquo) In addition if there is a difference between the
NAV attributable to a Creation Unit and the market value of the Creation Basket
exchanged for the Creation Unit the party conveying instruments with the lower value
will pay to the other an amount in cash equal to the difference (referred to as the ldquoCash
Componentrdquo)
Creations and redemptions must be made by or through an Authorized Participant
that has executed an agreement that has been agreed to by the Distributor and BNY with
respect to creations and redemptions of Creation Units All standard orders to create
Creation Units must be received by the transfer agent no later than the closing time of the
regular trading session on the New York Stock Exchange (ordinarily 400 pm Eastern
Time) (the ldquoClosing Timerdquo) in each case on the date such order is placed in order for the
creation of Creation Units to be effected based on the NAV of Shares as next determined
on such date after receipt of the order in proper form Shares may be redeemed only in
Creation Units at their NAV next determined after receipt not later than the Closing Time
of a redemption request in proper form by the Fund through the transfer agent and only
on a business day
The Fundrsquos custodian through the National Securities Clearing Corporation will
make available on each business day prior to the opening of business of the Exchange
the list of the names and quantities of the instruments comprising the Creation Basket as
well as the estimated Cash Component (if any) for that day The published Creation
Basket will apply until a new Creation Basket is announced on the following business
day prior to commencement of trading in the Shares
SR-NASDAQ-2015-011 Amendment No 2 Page 46 of 64
Net Asset Value
The Fundrsquos NAV will be determined as of the close of trading (normally
400 pm Eastern Time) on each day the New York Stock Exchange is open for
business NAV will be calculated for the Fund by taking the market price of the Fundrsquos
total assets including interest or dividends accrued but not yet collected less all
liabilities and dividing such amount by the total number of Shares outstanding The
result rounded to the nearest cent will be the NAV per Share All valuations will be
subject to review by the Board of Trustees of the Trust (ldquoTrust Boardrdquo) or its delegate
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with valuation procedures (which may be revised from time to time) adopted by the Trust
Board (the ldquoValuation Proceduresrdquo) and in accordance with the 1940 Act A market
valuation generally means a valuation (i) obtained from an exchange an independent
pricing service (ldquoPricing Servicerdquo) or a major market maker (or dealer) or (ii) based on a
price quotation or other equivalent indication of value supplied by an exchange a Pricing
Service or a major market maker (or dealer) The information summarized below is
based on the Valuation Procedures as currently in effect however as noted above the
Valuation Procedures are amended from time to time and therefore such information is
subject to change
Certain securities including Floating Rate Debt Instruments in which the Fund
may invest will not be listed on any securities exchange or board of trade Such
securities will typically be bought and sold by institutional investors in individually
negotiated private transactions that function in many respects like an over-the-counter
SR-NASDAQ-2015-011 Amendment No 2 Page 47 of 64
secondary market although typically no formal market makers will exist Certain
securities particularly debt securities will have few or no trades or trade infrequently
and information regarding a specific security may not be widely available or may be
incomplete Accordingly determinations of the fair value of debt securities may be
based on infrequent and dated information Because there is less reliable objective data
available elements of judgment may play a greater role in valuation of debt securities
than for other types of securities Typically Floating Rate Debt Instruments and other
debt securities in which the Fund may invest (other than those described below) will be
valued using information provided by a Pricing Service Debt securities having a
remaining maturity of 60 days or less when purchased will be valued at cost adjusted for
amortization of premiums and accretion of discounts provided the Adviserrsquos pricing
committee (the ldquoPricing Committeerdquo) has determined that the use of amortized cost is an
appropriate reflection of fair value given market and issuer-specific conditions existing at
the time of the determination Overnight repurchase agreements will be valued at cost
and term repurchase agreements (ie those whose maturity exceeds seven days) will be
valued at the average of the bid quotations obtained daily from at least two recognized
dealers
Asset-backed and mortgage-backed securities will generally be valued by using a
Pricing Service If a Pricing Service does not cover a particular asset-backed or
mortgage-backed security or discontinues covering a particular asset-backed or
mortgage-backed security the security will be priced using broker quotes generally
provided by brokers that make or participate in markets in the security To derive values
Pricing Services and broker-dealers may use matrix pricing and valuation models as well
SR-NASDAQ-2015-011 Amendment No 2 Page 48 of 64
as recent market transactions for the same or similar assets As it deems appropriate the
Pricing Committee may determine that a Pricing Service price does not represent an
accurate value of an asset-backed or mortgage-backed security based on broker quotes it
receives a recent trade in the security by the Fund information from a portfolio manager
or other market information In the event that the Pricing Committee determines that the
Pricing Service price is unreliable or inaccurate based on such other information broker
quotes may be used Additionally if the Pricing Committee determines that the price of
an asset-backed or mortgage-backed security obtained from a Pricing Service and
available broker quotes is unreliable or inaccurate due to market conditions or other
reasons or if a Pricing Service price or broker quote is unavailable the security will be
valued using fair value pricing as described below
Equity securities listed on any exchange other than the Exchange will be valued at
the last sale price on the exchange on which they are principally traded on the business
day as of which such value is being determined Equity securities listed on the Exchange
will be valued at the official closing price on the business day as of which such value is
being determined If there has been no sale on such day or no official closing price in
the case of securities traded on the Exchange the securities will be valued using fair
value pricing as described below Equity securities traded on more than one securities
exchange will be valued at the last sale price or official closing price as applicable on
the business day as of which such value is being determined at the close of the exchange
representing the principal market for such securities
Exchange-traded options and futures contracts will be valued at the closing price
in the market where such contracts are principally traded
SR-NASDAQ-2015-011 Amendment No 2 Page 49 of 64
Certain securities including Floating Rate Debt Instruments in which the Fund
will invest will not be able to be priced by pre-established pricing methods Such
securities may be valued by the Trust Board or its delegate at fair value The use of fair
value pricing by the Fund will be governed by the Valuation Procedures and conducted in
accordance with the provisions of the 1940 Act Valuing the Fundrsquos securities using fair
value pricing will result in using prices for those securities that may differ from current
market valuations or official closing prices on the applicable exchange
Availability of Information
The Fundrsquos website (wwwftportfolioscom) which will be publicly available
prior to the public offering of Shares will include a form of the prospectus for the Fund
that may be downloaded The website will include the Sharesrsquo ticker CUSIP and
exchange information along with additional quantitative information updated on a daily
basis including for the Fund (1) daily trading volume the prior business dayrsquos reported
NAV and closing price mid-point of the bidask spread at the time of calculation of such
NAV (the ldquoBidAsk Pricerdquo)33 and a calculation of the premium and discount of the
BidAsk Price against the NAV and (2) data in chart format displaying the frequency
distribution of discounts and premiums of the daily BidAsk Price against the NAV
within appropriate ranges for each of the four previous calendar quarters On each
business day before commencement of trading in Shares in the Regular Market Session34
33 The BidAsk Price of the Fund will be determined using the mid-point of the highest bid and the lowest offer on the Exchange as of the time of calculation of the Fundrsquos NAV The records relating to BidAsk Prices will be retained by the Fund and its service providers
34 See Nasdaq Rule 4120(b)(4) (describing the three trading sessions on the Exchange (1) Pre-Market Session from 4 am to 930 am Eastern Time (2)
SR-NASDAQ-2015-011 Amendment No 2 Page 50 of 64
on the Exchange the Fund will disclose on its website the identities and quantities of the
portfolio of securities and other assets (the ldquoDisclosed Portfoliordquo as defined in Nasdaq
Rule 5735(c)(2)) held by the Fund that will form the basis for the Fundrsquos calculation of
NAV at the end of the business day 35 The Fundrsquos disclosure of derivative positions in
the Disclosed Portfolio will include information that market participants can use to value
these positions intraday On a daily basis the Fund will disclose on the Fundrsquos website
the following information regarding each portfolio holding as applicable to the type of
holding ticker symbol CUSIP number or other identifier if any a description of the
holding (including the type of holding) the identity of the security or other asset or
instrument underlying the holding if any for options the option strike price quantity
held (as measured by for example par value notional value or number of shares
contracts or units) maturity date if any coupon rate if any effective date if any market
value of the holding and percentage weighting of the holding in the Fundrsquos portfolio
The website information will be publicly available at no charge
In addition for the Fund an estimated value defined in Rule 5735(c)(3) as the
ldquoIntraday Indicative Valuerdquo that reflects an estimated intraday value of the Fundrsquos
Disclosed Portfolio will be disseminated Moreover the Intraday Indicative Value
Regular Market Session from 930 am to 4 pm or 415 pm Eastern Time and (3) Post-Market Session from 4 pm or 415 pm to 8 pm Eastern Time)
Under accounting procedures to be followed by the Fund trades made on the prior business day (ldquoTrdquo) will be booked and reflected in NAV on the current business day (ldquoT+1rdquo) Accordingly the Fund will be able to disclose at the beginning of the business day the portfolio that will form the basis for the NAV calculation at the end of the business day
35
SR-NASDAQ-2015-011 Amendment No 2 Page 51 of 64
available on the NASDAQ OMX Information LLC proprietary index data service36 will
be based upon the current value for the components of the Disclosed Portfolio and will be
updated and widely disseminated by one or more major market data vendors and broadly
displayed at least every 15 seconds during the Regular Market Session The Intraday
Indicative Value will be based on quotes and closing prices from the securitiesrsquo local
market and may not reflect events that occur subsequent to the local marketrsquos close
Premiums and discounts between the Intraday Indicative Value and the market price may
occur This should not be viewed as a ldquoreal timerdquo update of the NAV per Share of the
Fund which is calculated only once a day
The dissemination of the Intraday Indicative Value together with the Disclosed
Portfolio will allow investors to determine the value of the underlying portfolio of the
Fund on a daily basis and will provide a close estimate of that value throughout the
trading day
Investors will also be able to obtain the Fundrsquos Statement of Additional
Information (ldquoSAIrdquo) the Fundrsquos annual and semi-annual reports (together ldquoShareholder
Reportsrdquo) and its Form N-CSR and Form N-SAR filed twice a year The Fundrsquos SAI
and Shareholder Reports will be available free upon request from the Fund and those
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or
downloaded from the Commissionrsquos website at wwwsecgov Information regarding
Currently the NASDAQ OMX Global Index Data Service (ldquoGIDSrdquo) is the NASDAQ OMX global index data feed service offering real-time updates daily summary messages and access to widely followed indexes and Intraday Indicative Values for ETFs GIDS provides investment professionals with the daily information needed to track or trade NASDAQ OMX indexes listed ETFs or third-party partner indexes and ETFs
36
SR-NASDAQ-2015-011 Amendment No 2 Page 52 of 64
market price and trading volume of the Shares will be continually available on a real-time
basis throughout the day on brokersrsquo computer screens and other electronic services
Information regarding the previous dayrsquos closing price and trading volume information
for the Shares will be published daily in the financial section of newspapers Quotation
and last sale information for the Shares will be available via Nasdaq proprietary quote
and trade services as well as in accordance with the Unlisted Trading Privileges and the
Consolidated Tape Association (ldquoCTArdquo) plans for the Shares Quotation and last sale
information for the other ETFs in which the Fund will invest will be available via the
quote and trade services of their respective primary exchanges as well as in accordance
with the Unlisted Trading Privileges and the CTA plans as applicable Quotation and
last sale information for US exchange-traded options will be available via the Options
Price Reporting Authority Intraday executable price quotations on Floating Rate Debt
Instruments and other assets not traded on an exchange will be available from major
broker-dealer firms or market data vendors as well as from automated quotation systems
published or other public sources or online information services Additionally the Trade
Reporting and Compliance Engine (ldquoTRACErdquo) of the Financial Industry Regulatory
Authority (ldquoFINRArdquo) will be a source of price information for corporate bonds
privately-issued securities mortgage-backed securities and asset-backed securities to the
extent transactions in such securities are reported to TRACE37 For exchange-traded
Broker-dealers that are FINRA member firms have an obligation to report transactions in specified debt securities to TRACE to the extent required under applicable FINRA rules Generally such debt securities will have at issuance a maturity that exceeds one calendar year
37
SR-NASDAQ-2015-011 Amendment No 2 Page 53 of 64
assets intraday pricing information will be available directly from the applicable listing
exchange
Additional information regarding the Fund and the Shares including investment
strategies risks creation and redemption procedures fees Fund holdings disclosure
policies distributions and taxes will be included in the Registration Statement
Initial and Continued Listing
The Shares will be subject to Rule 5735 which sets forth the initial and continued
listing criteria applicable to Managed Fund Shares The Exchange represents that for
initial andor continued listing the Fund must be in compliance with Rule 10A-338 under
the Act A minimum of 100000 Shares will be outstanding at the commencement of
trading on the Exchange The Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the NAV and the
Disclosed Portfolio will be made available to all market participants at the same time
Trading Halts
With respect to trading halts the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading in the Shares of the Fund Nasdaq will
halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12) Trading may be
halted because of market conditions or for reasons that in the view of the Exchange
make trading in the Shares inadvisable These may include (1) the extent to which
trading is not occurring in the securities andor the other assets constituting the Disclosed
Portfolio of the Fund or (2) whether other unusual conditions or circumstances
See 17 CFR 24010A-3 38
SR-NASDAQ-2015-011 Amendment No 2 Page 54 of 64
detrimental to the maintenance of a fair and orderly market are present Trading in the
Shares also will be subject to Rule 5735(d)(2)(D) which sets forth circumstances under
which Shares of the Fund may be halted
Trading Rules
Nasdaq deems the Shares to be equity securities thus rendering trading in the
Shares subject to Nasdaqrsquos existing rules governing the trading of equity securities
Nasdaq will allow trading in the Shares from 400 am until 800 pm Eastern Time
The Exchange has appropriate rules to facilitate transactions in the Shares during all
trading sessions As provided in Nasdaq Rule 5735(b)(3) the minimum price variation
for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $001
Surveillance
The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws39 The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities laws
The surveillances referred to above generally focus on detecting securities trading
outside their normal patterns which could be indicative of manipulative or other violative
activity When such situations are detected surveillance analysis follows and
FINRA surveils trading on the Exchange pursuant to a regulatory services agreement The Exchange is responsible for FINRArsquos performance under this regulatory services agreement
39
SR-NASDAQ-2015-011 Amendment No 2 Page 55 of 64
investigations are opened where appropriate to review the behavior of all relevant
parties for all relevant trading violations
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 56 of 64
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
SR-NASDAQ-2015-011 Amendment No 2 Page 57 of 64
2 Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
SR-NASDAQ-2015-011 Amendment No 2 Page 58 of 64
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
SR-NASDAQ-2015-011 Amendment No 2 Page 59 of 64
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
SR-NASDAQ-2015-011 Amendment No 2 Page 60 of 64
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 61 of 64
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
SR-NASDAQ-2015-011 Amendment No 2 Page 62 of 64
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
B Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
C Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received From Members Participants or Others
Written comments were neither solicited nor received
III Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Within 45 days of the date of publication of this notice in the Federal Register or
within such longer period (i) as the Commission may designate up to 90 days of such date
if it finds such longer period to be appropriate and publishes its reasons for so finding or
(ii) as to which the Exchange consents the Commission shall (a) by order approve or
disapprove such proposed rule change or (b) institute proceedings to determine whether
the proposed rule change should be disapproved
SR-NASDAQ-2015-011 Amendment No 2 Page 63 of 64
IV Solicitation of Comments
Interested persons are invited to submit written data views and arguments
concerning the foregoing including whether the proposed rule change is consistent with
the Act Comments may be submitted by any of the following methods
Electronic comments
bull Use the Commissionrsquos Internet comment form
(httpwwwsecgovrulessroshtml) or
bull Send an e-mail to rule-commentssecgov Please include File Number
SR-NASDAQ-2015-011 on the subject line
Paper comments
bull Send paper comments in triplicate to Brent J Fields Secretary Securities and
Exchange Commission Station Place 100 F Street NE Washington DC
20549-9303
All submissions should refer to File Number SR-NASDAQ-2015-011 This file number
should be included on the subject line if e-mail is used To help the Commission process
and review your comments more efficiently please use only one method The
Commission will post all comments on the Commissionrsquos Internet website
httpwwwsecgovrulessroshtml
Copies of the submission all subsequent amendments all written statements with
respect to the proposed rule change that are filed with the Commission and all written
communications relating to the proposed rule change between the Commission and any
person other than those that may be withheld from the public in accordance with the
provisions of 5 USC 552 will be available for website viewing and printing in the
Commissionrsquos Public Reference Room 100 F Street NE Washington DC 20549 on
SR-NASDAQ-2015-011 Amendment No 2 Page 64 of 64
official business days between the hours of 1000 am and 300 pm Copies of the filing
also will be available for inspection and copying at the principal office of Nasdaq All
comments received will be posted without change the Commission does not edit
personal identifying information from submissions You should submit only information
that you wish to make available publicly
All submissions should refer to File Number SR-NASDAQ-2015-011 and should
be submitted on or before [insert date 21 days from publication in the Federal Register]
For the Commission by the Division of Trading and Markets pursuant to
delegated authority41
Kevin M OrsquoNeill Deputy Secretary
17 CFR 20030-3(a)(12) 41
SR-NASDAQ-2015-011 Amendment No 2 Page 30 of 64
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
SR-NASDAQ-2015-011 Amendment No 2 Page 31 of 64
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
4 Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
5 Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received from Members Participants or Others
Written comments were neither solicited nor received
6 Extension of Time Period for Commission Action
The Exchange does not consent at this time to an extension of any time period for
Commission action
7 Basis for Summary Effectiveness Pursuant to Section 19(b)(3) or for Accelerated Effectiveness Pursuant to Section 19(b)(2)
Not applicable
8 Proposed Rule Change Based on Rules of Another Self-Regulatory Organization or of the Commission
Not applicable
9 Security-Based Swap Submissions Filed Pursuant to Section 3C of the Act
Not applicable
SR-NASDAQ-2015-011 Amendment No 2 Page 32 of 64
10 Advance Notices Filed Pursuant to Section 806(e) of the Payment Clearing and Settlement Supervision Act
Not applicable
11 Exhibits
1 Completed notice of proposed rule change for publication in the Federal
Register
SR-NASDAQ-2015-011 Amendment No 2 Page 33 of 64
EXHIBIT 1
SECURITIES AND EXCHANGE COMMISSION (Release No 34shy File No SR-NASDAQ-2015-011)
April __ 2015
Self-Regulatory Organizations The NASDAQ Stock Market LLC Notice of Filing of Proposed Rule Change Relating to the Listing and Trading of the Shares of the First Trust Strategic Floating Rate ETF of First Trust Exchange-Traded Fund IV
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (ldquoActrdquo)1 and
Rule 19b-4 thereunder2 notice is hereby given that on February 12 2015 The NASDAQ
Stock Market LLC (ldquoNasdaqrdquo or the ldquoExchangerdquo) filed with the Securities and Exchange
Commission (ldquoCommissionrdquo) the proposed rule change as described in in Items I II and
III below which Items have been prepared by Nasdaq On April 6 2015 Nasdaq filed
Amendment No 1 which replaced the text of the original filing in its entirety On April
15 2015 Nasdaq filed Amendment No 2 which replaced the text of the original filing in
its entirety The Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons
I Self-Regulatory Organizationrsquos Statement of the Terms of Substance of the Proposed Rule Change
Nasdaq proposes to list and trade the shares of the First Trust Strategic Floating
Rate ETF (the ldquoFundrdquo) of the First Trust Strategic Floating Rate ETF (the ldquoFundrdquo) of
First Trust Exchange-Traded Fund IV (the ldquoTrustrdquo) under Nasdaq Rule 5735 (ldquoManaged
1 15 USC 78s(b)(1)
2 17 CFR 24019b-4
SR-NASDAQ-2015-011 Amendment No 2 Page 34 of 64
Fund Sharesrdquo)3 The shares of the Fund are collectively referred to herein as the
ldquoSharesrdquo
The text of the proposed rule change is available at
httpnasdaqcchwallstreetcom at Nasdaqrsquos principal office and at the Commissionrsquos
Public Reference Room
II Self-Regulatory Organizationrsquos Statement of the Purpose of and Statutory Basis for the Proposed Rule Change
In its filing with the Commission Nasdaq included statements concerning the
purpose of and basis for the proposed rule change The text of these statements may be
examined at the places specified in Item IV below Nasdaq has prepared summaries set
forth in Sections A B and C below of the most significant aspects of such statements
A Self-Regulatory Organizationrsquos Statement of the Purpose of and Statutory Basis for the Proposed Rule Change
1 Purpose
The Exchange proposes to list and trade the Shares of the Fund under Nasdaq
Rule 5735 which governs the listing and trading of Managed Fund Shares4 on the
3 The Commission approved Nasdaq Rule 5735 in Securities Exchange Act Release No 57962 (June 13 2008) 73 FR 35175 (June 20 2008) (SR-NASDAQ-2008shy039) There are already multiple actively-managed funds listed on the Exchange see eg Securities Exchange Act Release Nos 69464 (April 26 2013) 78 FR 25774 (May 2 2013) (SR-NASDAQ-2013-036) (order approving listing and trading of First Trust Senior Loan Fund) 68972 (February 22 2013) 78 FR 13721 (February 28 2013) (SR-NASDAQ-2012-147) (order approving listing and trading of First Trust High Yield LongShort ETF) 66489 (February 29 2012) 77 FR 13379 (March 6 2012) (SR-NASDAQ-2012-004) (order approving listing and trading of WisdomTree Emerging Markets Corporate Bond Fund) The Exchange believes the proposed rule change raises no significant issues not previously addressed in those prior Commission orders
4 A Managed Fund Share is a security that represents an interest in an investment company registered under the Investment Company Act of 1940 (15 USC 80ashy
SR-NASDAQ-2015-011 Amendment No 2 Page 35 of 64
Exchange The Fund will be an actively-managed exchange-traded fund (ldquoETFrdquo) The
Shares will be offered by the Trust which was established as a Massachusetts business
trust on September 15 20105 The Trust is registered with the Commission as an
investment company and has filed a registration statement on Form N-1A (ldquoRegistration
Statementrdquo) with the Commission6 The Fund will be a series of the Trust The Fund
intends to qualify each year as a regulated investment company (ldquoRICrdquo) under
Subchapter M of the Internal Revenue Code of 1986 as amended
First Trust Advisors LP will be the investment adviser (ldquoAdviserrdquo) to the Fund
First Trust Portfolios LP (the ldquoDistributorrdquo) will be the principal underwriter and
distributor of the Fundrsquos Shares The Bank of New York Mellon Corporation (ldquoBNYrdquo)
will act as the administrator accounting agent custodian and transfer agent to the Fund
1) (the ldquo1940 Actrdquo) organized as an open-end investment company or similar entity that invests in a portfolio of securities selected by its investment adviser consistent with its investment objectives and policies In contrast an open-end investment company that issues Index Fund Shares listed and traded on the Exchange under Nasdaq Rule 5705 seeks to provide investment results that correspond generally to the price and yield performance of a specific foreign or domestic stock index fixed income securities index or combination thereof
5 The Commission has issued an order upon which the Trust may rely granting certain exemptive relief under the 1940 Act See Investment Company Act Release No 30029 (April 10 2012) (File No 812-13795) (the ldquoExemptive Reliefrdquo) In addition the Commission has issued no-action relief upon which the Trust may rely pertaining to the Fundrsquos ability to invest in derivatives notwithstanding certain representations in the application for the Exemptive Relief See Commission No-Action Letter (December 6 2012)
6 See Post-Effective Amendment No 104 to Registration Statement on Form N-1A for the Trust dated January 29 2015 (File Nos 333-174332 and 811-22559) The descriptions of the Fund and the Shares contained herein are based in part on information in the Registration Statement
7
SR-NASDAQ-2015-011 Amendment No 2 Page 36 of 64
Paragraph (g) of Rule 5735 provides that if the investment adviser to the
investment company issuing Managed Fund Shares is affiliated with a broker-dealer
such investment adviser shall erect a ldquofire wallrdquo between the investment adviser and the
broker-dealer with respect to access to information concerning the composition andor
changes to such investment company portfolio7 In addition paragraph (g) further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio Rule 5735(g) is similar
to Nasdaq Rule 5705(b)(5)(A)(i) however paragraph (g) in connection with the
establishment of a ldquofire wallrdquo between the investment adviser and the broker-dealer
reflects the applicable open-end fundrsquos portfolio not an underlying benchmark index as
is the case with index-based funds The Adviser is not a broker-dealer although it is
affiliated with the Distributor a broker-dealer The Adviser has implemented a fire wall
An investment adviser to an open-end fund is required to be registered under the Investment Advisers Act of 1940 (the ldquoAdvisers Actrdquo) As a result the Adviser and its related personnel are subject to the provisions of Rule 204A-1 under the Advisers Act relating to codes of ethics This Rule requires investment advisers to adopt a code of ethics that reflects the fiduciary nature of the relationship to clients as well as compliance with other applicable securities laws Accordingly procedures designed to prevent the communication and misuse of non-public information by an investment adviser must be consistent with Rule 204A-1 under the Advisers Act In addition Rule 206(4)-7 under the Advisers Act makes it unlawful for an investment adviser to provide investment advice to clients unless such investment adviser has (i) adopted and implemented written policies and procedures reasonably designed to prevent violation by the investment adviser and its supervised persons of the Advisers Act and the Commission rules adopted thereunder (ii) implemented at a minimum an annual review regarding the adequacy of the policies and procedures established pursuant to subparagraph (i) above and the effectiveness of their implementation and (iii) designated an individual (who is a supervised person) responsible for administering the policies and procedures adopted under subparagraph (i) above
8
SR-NASDAQ-2015-011 Amendment No 2 Page 37 of 64
with respect to its broker-dealer affiliate regarding access to information concerning the
composition andor changes to the portfolio In addition personnel who make decisions
on the Fundrsquos portfolio composition will be subject to procedures designed to prevent the
use and dissemination of material non-public information regarding the Fundrsquos portfolio
In the event (a) the Adviser becomes or becomes newly affiliated with a broker-dealer
or (b) any new adviser or sub-adviser is a registered broker-dealer or becomes affiliated
with another broker-dealer it will implement a fire wall with respect to its relevant
personnel andor such broker-dealer affiliate as applicable regarding access to
information concerning the composition andor changes to the portfolio and will be
subject to procedures designed to prevent the use and dissemination of material
non-public information regarding such portfolio The Fund does not currently intend to
use a sub-adviser
First Trust Strategic Floating Rate ETF
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions8 at least 80 of its
The term ldquounder normal market conditionsrdquo as used herein includes but is not limited to the absence of adverse market economic political or other conditions including extreme volatility or trading halts in the fixed income markets or the financial markets generally operational issues causing dissemination of inaccurate market information or force majeure type events such as systems failure natural or man-made disaster act of God armed conflict act of terrorism riot or labor disruption or any similar intervening circumstance For temporary defensive purposes during the initial invest-up period and during periods of high cash inflows or outflows the Fund may depart from its principal investment strategies for example it may hold a higher than normal proportion of its assets in cash During such periods the Fund may not be able to achieve its investment objective The Fund may adopt a defensive strategy when the Adviser believes securities in which the Fund normally invests have elevated risks due to political or economic factors and in other extraordinary circumstances
SR-NASDAQ-2015-011 Amendment No 2 Page 38 of 64
net assets in a portfolio of the following types of floating-rate9 debt instruments issued by
US and non-US public- and private-sector entities floating-rate corporate10 and
government bonds and notes floating-rate agency securities 11 floating-rate instruments
of non-US issuers floating-rate privately-issued securities 12 floating-rate asset-backed
securities 13 floating-rate mortgage-backed securities14 floating-rate loans 15 and
9 For the avoidance of doubt the term ldquofloating-raterdquo shall also include similar terms such as ldquovariable-raterdquo and ldquoadjustable-raterdquo
10 The Adviser expects that under normal market conditions generally for a corporate bond to be considered as an eligible investment after taking into account such an investment at least 75 of the Fundrsquos net assets that are invested in floating-rate corporate bonds and as described below fixed-rate corporate bonds (in the aggregate) will be comprised of corporate bonds that have at the time of original issuance $100 million or more par amount outstanding
11 ldquoAgency securitiesrdquo for these purposes generally includes securities issued by the following entities Government National Mortgage Association (Ginnie Mae) Federal National Mortgage Association (Fannie Mae) Federal Home Loan Banks (FHLBanks) Federal Home Loan Mortgage Corporation (Freddie Mac) Farm Credit System (FCS) Farm Credit Banks (FCBanks) Student Loan Marketing Association (Sallie Mae) Resolution Funding Corporation (REFCORP) Financing Corporation (FICO) and the Farm Credit System (FCS) Financial Assistance Corporation (FAC) Agency securities can include but are not limited to mortgage-backed securities
12 ldquoPrivately-issued securitiesrdquo for these purposes generally includes Rule 144A securities other than mortgage-backed Rule 144A securities Under normal market conditions privately-issued securities will have at the time of original issuance $100 million or more principal amount outstanding to be considered eligible investments
13 Asset-backed securities are securities that are backed by a pool of assets The Fund currently intends to invest in asset-backed securities that are consumer asset-backed securities
14 Mortgage-backed securities which are securities that directly or indirectly represent a participation in or are secured by and payable from mortgage loans on real property will consist of (1) residential mortgage-backed securities (ldquoRMBSrdquo) (2) commercial mortgage-backed securities (ldquoCMBSrdquo) (3) stripped mortgage-backed securities (ldquoSMBSrdquo) which are mortgage-backed securities
SR-NASDAQ-2015-011 Amendment No 2 Page 39 of 64
investment companies16 (including investment companies advised by the Adviser) that
invest primarily in the foregoing types of debt instruments17 (collectively ldquoFloating Rate
Debt Instrumentsrdquo)
where mortgage payments are divided between paying the loanrsquos principal and paying the loanrsquos interest (4) collateralized mortgage obligations (ldquoCMOsrdquo) and real estate mortgage investment conduits (ldquoREMICsrdquo) which are mortgage-backed securities that are divided into multiple classes with each class being entitled to a different share of the principal and interest payments received from the pool of underlying assets
15 The floating-rate loans in which the Fund will invest will represent amounts borrowed by companies or other entities from banks and other lenders and a significant portion of such floating-rate loans may be rated below investment grade or unrated Floating-rate loans held by the Fund may be senior or subordinate obligations of the borrower and may or may not be secured by collateral First lien senior secured floating-rate loans are referred to herein as ldquosenior loansrdquo Floating-rate loans that are not senior loans (ie unsecured floating-rate loans and secured floating-rate loans that are not first lien floating-rate loans) are referred to herein as ldquojunior loansrdquo The Fund will generally invest in floating-rate loans that the Adviser deems to be liquid with readily available prices notwithstanding the foregoing the Fund may invest in floating-rate loans that are deemed illiquid so long as the Fund complies with the 15 limitation on investments of its net assets in illiquid assets described below under ldquoInvestment Restrictionsrdquo
16 The Fund currently anticipates investing only in registered open-end investment companies that are listed and traded in the US on registered exchanges (ie other ETFs) An ETF is an investment company registered under the 1940 Act that holds a portfolio of securities Many ETFs are designed to track the performance of a securities index including industry sector country and region indexes The Fund may invest in the securities of ETFs in excess of the limits imposed under the 1940 Act pursuant to exemptive orders obtained by other ETFs and their sponsors from the Commission In addition the Fund may invest in the securities of certain investment companies in excess of the limits imposed under the 1940 Act pursuant to an exemptive order obtained by the Trust and the Adviser from the Commission See Investment Company Act Release No 30377 (February 5 2013) (File No 812-13895) The ETFs in which the Fund may invest include Index Fund Shares (as described in Nasdaq Rule 5705) Portfolio Depository Receipts (as described in Nasdaq Rule 5705) and Managed Fund Shares (as described in Nasdaq Rule 5735) While the Fund may invest in inverse ETFs the Fund will not invest in leveraged or inverse leveraged (eg 2X or -3X) ETFs
SR-NASDAQ-2015-011 Amendment No 2 Page 40 of 64
At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade To be considered
ldquoinvestment graderdquo under normal market conditions rated Floating Rate Debt
Instruments will carry at the time of purchase a rating in the highest four rating
categories of at least one nationally recognized statistical ratings organization
(ldquoNRSROrdquo) (eg BBB- or higher by Standard amp Poorrsquos Ratings Services (ldquoSampPrdquo)
andor Fitch Ratings (ldquoFitchrdquo) or Baa3 or higher by Moodyrsquos Investors Service Inc
(ldquoMoodyrsquosrdquo)18 For unrated securities to be considered ldquoinvestment graderdquo under normal
market conditions such securities will be determined at the time of purchase to be of
comparable quality19 by the Adviser The Fund may invest up to 35 of its net assets in
securities that are at the time of investment rated below investment grade by each
NRSRO rating such securities (or securities that are unrated and determined by the
17 The liquidity of a security especially in the case of asset-backed and mortgage-backed securities will be a substantial factor in the Fundrsquos security selection process Consistent with the discussion below under ldquoInvestment Restrictionsrdquo the Fund will not purchase any Floating Rate Debt Instruments (including asset-backed securities and mortgage-backed securities) that in the Adviserrsquos opinion are illiquid if as a result more than 15 of the value of the Fundrsquos net assets will be invested in illiquid assets
18 For the avoidance of doubt if a security is rated by multiple NRSROs and receives different ratings the Fund will treat the security as being rated in the highest rating category received from an NRSRO
19 Comparable quality of unrated securities will be determined by the Adviser based on fundamental credit analysis of the unrated security and comparable NRSRO-rated securities On a best efforts basis the Adviser will attempt to make a rating determination based on publicly available data In making a ldquocomparable qualityrdquo determination the Adviser may consider for example whether the issuer of the security has issued other rated securities the nature and provisions of the relevant security whether the obligations under the relevant security are guaranteed by another entity and the rating of such guarantor (if any) relevant cash flows macroeconomic analysis andor sector or industry analysis
SR-NASDAQ-2015-011 Amendment No 2 Page 41 of 64
Adviser to be of comparable quality) commonly referred to as ldquohigh yieldrdquo or ldquojunkrdquo
bonds If subsequent to purchase by the Fund a security held by the Fund experiences a
decline in credit quality and falls below investment grade the Fund may continue to hold
the security and it will not cause the Fund to violate the 35 investment limitation
however the security will be taken into account for purposes of determining whether
purchases of additional securities will cause the Fund to violate such limitation
The Fund will limit its investments in asset-backed securities (excluding agency
mortgage-backed securities) and non-agency mortgage-backed securities (in the
aggregate) to 20 of its net assets20 In addition the Fund will limit its investments in
junior loans to 20 of its net assets
The Fund will hold debt securities (including in the aggregate Floating Rate
Debt Instruments and the fixed-rate debt securities described below) of at least 13
non-affiliated issuers
Other Investments
Under normal market conditions the Fund will invest primarily in the Floating
Rate Debt Instruments described above to meet its investment objective In addition the
Fund may invest up to 20 of its net assets in the following types of fixed-rate debt
securities corporate21 and government bonds and notes agency securities22 instruments
20 For the avoidance of doubt there is no limitation on the Fundrsquos investments in agency mortgage-backed securities
21 See footnote 10 above
22 See footnote 11 above
SR-NASDAQ-2015-011 Amendment No 2 Page 42 of 64
of non-US issuers in developed markets privately-issued securities 23 asset-backed
securities 24 mortgage-backed securities 25 municipal bonds money market securities26
and investment companies27 (including investment companies advised by the Adviser)
that invest primarily in the foregoing types of debt securities
Further to pursue its investment objective the Fund may invest up to 20 of the
value of its net assets in exchange-listed options on US Treasury futures contracts and
exchange-listed US Treasury futures contracts28 The use of these derivative
transactions may allow the Fund to obtain net long or short exposures to selected interest
rates These derivatives may also be used to hedge risks including interest rate risks and
credit risks associated with the Fundrsquos portfolio investments The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
23 See footnote 12 above
24 See footnote 13 above
25 See footnote 14 above
26 ldquoMoney market securitiesrdquo for these purposes generally includes short-term high-quality obligations issued or guaranteed by the US Treasury or the agencies or instrumentalities of the US government short-term high-quality securities issued or guaranteed by non-US governments agencies and instrumentalities repurchase agreements commercial paper (both asset-backed and non-assetshybacked) and deposits and other obligations of US and non-US banks and financial institutions
27 See footnote 16 above
28 At least 90 of the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be invested in instruments that trade in markets that are members of the Intermarket Surveillance Group (ldquoISGrdquo) (see footnote 40 below) or are parties to a comprehensive surveillance sharing agreement with the Exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 43 of 64
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index
Investment Restrictions
The Fund will not invest 25 or more of the value of its total assets in securities
of issuers in any one industry This restriction does not apply to (a) obligations issued or
guaranteed by the US government its agencies or instrumentalities or (b) securities of
other investment companies29
The Fund may hold up to an aggregate amount of 15 of its net assets in illiquid
assets (calculated at the time of investment) including Rule 144A securities deemed
illiquid by the Adviser30 The Fund will monitor its portfolio liquidity on an ongoing
basis to determine whether in light of current circumstances an adequate level of
liquidity is being maintained and will consider taking appropriate steps in order to
maintain adequate liquidity if through a change in values net assets or other
circumstances more than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid
assets include securities subject to contractual or other restrictions on resale and other
29 See Form N-1A Item 9 The Commission has taken the position that a fund is concentrated if it invests more than 25 of the value of its total assets in any one industry See eg Investment Company Act Release No 9011 (October 30 1975) 40 FR 54241 (November 21 1975)
30 In reaching liquidity decisions the Adviser may consider the following factors the frequency of trades and quotes for the security the number of dealers wishing to purchase or sell the security and the number of other potential purchasers dealer undertakings to make a market in the security and the nature of the security and the nature of the marketplace in which it trades (eg the time needed to dispose of the security the method of soliciting offers and the mechanics of transfer)
SR-NASDAQ-2015-011 Amendment No 2 Page 44 of 64
instruments that lack readily available markets as determined in accordance with
Commission staff guidance31
The Fund will not invest in non-US equity securities
Creation and Redemption of Shares
The Fund will issue and redeem Shares on a continuous basis at net asset value
(ldquoNAVrdquo)32 only in large blocks of Shares (ldquoCreation Unitsrdquo) in transactions with
authorized participants generally including broker-dealers and large institutional
investors (ldquoAuthorized Participantsrdquo) Creation Units generally will consist of 50000
Shares although this may change from time to time Creation Units however are not
expected to consist of less than 50000 Shares As described in the Registration
Statement and consistent with the Exemptive Relief the Fund will issue and redeem
Creation Units in exchange for an in-kind portfolio of instruments andor cash in lieu of
31 The Commission has stated that long-standing Commission guidelines have required open-end funds to hold no more than 15 of their net assets in illiquid securities and other illiquid assets See Investment Company Act Release No 28193 (March 11 2008) 73 FR 14618 (March 18 2008) footnote 34 See also Investment Company Act Release No 5847 (October 21 1969) 35 FR 19989 (December 31 1970) (Statement Regarding ldquoRestricted Securitiesrdquo) Investment Company Act Release No 18612 (March 12 1992) 57 FR 9828 (March 20 1992) (Revisions of Guidelines to Form N-1A) A fundrsquos portfolio security is illiquid if it cannot be disposed of in the ordinary course of business within seven days at approximately the value ascribed to it by the fund See Investment Company Act Release No 14983 (March 12 1986) 51 FR 9773 (March 21 1986) (adopting amendments to Rule 2a-7 under the 1940 Act) Investment Company Act Release No 17452 (April 23 1990) 55 FR 17933 (April 30 1990) (adopting Rule 144A under the Securities Act of 1933)
32 The NAV of the Fundrsquos Shares generally will be calculated once daily Monday through Friday as of the close of regular trading on the New York Stock Exchange generally 400 pm Eastern Time (the ldquoNAV Calculation Timerdquo) NAV per Share will be calculated by dividing the Fundrsquos net assets by the number of Fund Shares outstanding For more information regarding the valuation of Fund investments in calculating the Fundrsquos NAV see the Registration Statement
SR-NASDAQ-2015-011 Amendment No 2 Page 45 of 64
such instruments (the ldquoCreation Basketrdquo) In addition if there is a difference between the
NAV attributable to a Creation Unit and the market value of the Creation Basket
exchanged for the Creation Unit the party conveying instruments with the lower value
will pay to the other an amount in cash equal to the difference (referred to as the ldquoCash
Componentrdquo)
Creations and redemptions must be made by or through an Authorized Participant
that has executed an agreement that has been agreed to by the Distributor and BNY with
respect to creations and redemptions of Creation Units All standard orders to create
Creation Units must be received by the transfer agent no later than the closing time of the
regular trading session on the New York Stock Exchange (ordinarily 400 pm Eastern
Time) (the ldquoClosing Timerdquo) in each case on the date such order is placed in order for the
creation of Creation Units to be effected based on the NAV of Shares as next determined
on such date after receipt of the order in proper form Shares may be redeemed only in
Creation Units at their NAV next determined after receipt not later than the Closing Time
of a redemption request in proper form by the Fund through the transfer agent and only
on a business day
The Fundrsquos custodian through the National Securities Clearing Corporation will
make available on each business day prior to the opening of business of the Exchange
the list of the names and quantities of the instruments comprising the Creation Basket as
well as the estimated Cash Component (if any) for that day The published Creation
Basket will apply until a new Creation Basket is announced on the following business
day prior to commencement of trading in the Shares
SR-NASDAQ-2015-011 Amendment No 2 Page 46 of 64
Net Asset Value
The Fundrsquos NAV will be determined as of the close of trading (normally
400 pm Eastern Time) on each day the New York Stock Exchange is open for
business NAV will be calculated for the Fund by taking the market price of the Fundrsquos
total assets including interest or dividends accrued but not yet collected less all
liabilities and dividing such amount by the total number of Shares outstanding The
result rounded to the nearest cent will be the NAV per Share All valuations will be
subject to review by the Board of Trustees of the Trust (ldquoTrust Boardrdquo) or its delegate
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with valuation procedures (which may be revised from time to time) adopted by the Trust
Board (the ldquoValuation Proceduresrdquo) and in accordance with the 1940 Act A market
valuation generally means a valuation (i) obtained from an exchange an independent
pricing service (ldquoPricing Servicerdquo) or a major market maker (or dealer) or (ii) based on a
price quotation or other equivalent indication of value supplied by an exchange a Pricing
Service or a major market maker (or dealer) The information summarized below is
based on the Valuation Procedures as currently in effect however as noted above the
Valuation Procedures are amended from time to time and therefore such information is
subject to change
Certain securities including Floating Rate Debt Instruments in which the Fund
may invest will not be listed on any securities exchange or board of trade Such
securities will typically be bought and sold by institutional investors in individually
negotiated private transactions that function in many respects like an over-the-counter
SR-NASDAQ-2015-011 Amendment No 2 Page 47 of 64
secondary market although typically no formal market makers will exist Certain
securities particularly debt securities will have few or no trades or trade infrequently
and information regarding a specific security may not be widely available or may be
incomplete Accordingly determinations of the fair value of debt securities may be
based on infrequent and dated information Because there is less reliable objective data
available elements of judgment may play a greater role in valuation of debt securities
than for other types of securities Typically Floating Rate Debt Instruments and other
debt securities in which the Fund may invest (other than those described below) will be
valued using information provided by a Pricing Service Debt securities having a
remaining maturity of 60 days or less when purchased will be valued at cost adjusted for
amortization of premiums and accretion of discounts provided the Adviserrsquos pricing
committee (the ldquoPricing Committeerdquo) has determined that the use of amortized cost is an
appropriate reflection of fair value given market and issuer-specific conditions existing at
the time of the determination Overnight repurchase agreements will be valued at cost
and term repurchase agreements (ie those whose maturity exceeds seven days) will be
valued at the average of the bid quotations obtained daily from at least two recognized
dealers
Asset-backed and mortgage-backed securities will generally be valued by using a
Pricing Service If a Pricing Service does not cover a particular asset-backed or
mortgage-backed security or discontinues covering a particular asset-backed or
mortgage-backed security the security will be priced using broker quotes generally
provided by brokers that make or participate in markets in the security To derive values
Pricing Services and broker-dealers may use matrix pricing and valuation models as well
SR-NASDAQ-2015-011 Amendment No 2 Page 48 of 64
as recent market transactions for the same or similar assets As it deems appropriate the
Pricing Committee may determine that a Pricing Service price does not represent an
accurate value of an asset-backed or mortgage-backed security based on broker quotes it
receives a recent trade in the security by the Fund information from a portfolio manager
or other market information In the event that the Pricing Committee determines that the
Pricing Service price is unreliable or inaccurate based on such other information broker
quotes may be used Additionally if the Pricing Committee determines that the price of
an asset-backed or mortgage-backed security obtained from a Pricing Service and
available broker quotes is unreliable or inaccurate due to market conditions or other
reasons or if a Pricing Service price or broker quote is unavailable the security will be
valued using fair value pricing as described below
Equity securities listed on any exchange other than the Exchange will be valued at
the last sale price on the exchange on which they are principally traded on the business
day as of which such value is being determined Equity securities listed on the Exchange
will be valued at the official closing price on the business day as of which such value is
being determined If there has been no sale on such day or no official closing price in
the case of securities traded on the Exchange the securities will be valued using fair
value pricing as described below Equity securities traded on more than one securities
exchange will be valued at the last sale price or official closing price as applicable on
the business day as of which such value is being determined at the close of the exchange
representing the principal market for such securities
Exchange-traded options and futures contracts will be valued at the closing price
in the market where such contracts are principally traded
SR-NASDAQ-2015-011 Amendment No 2 Page 49 of 64
Certain securities including Floating Rate Debt Instruments in which the Fund
will invest will not be able to be priced by pre-established pricing methods Such
securities may be valued by the Trust Board or its delegate at fair value The use of fair
value pricing by the Fund will be governed by the Valuation Procedures and conducted in
accordance with the provisions of the 1940 Act Valuing the Fundrsquos securities using fair
value pricing will result in using prices for those securities that may differ from current
market valuations or official closing prices on the applicable exchange
Availability of Information
The Fundrsquos website (wwwftportfolioscom) which will be publicly available
prior to the public offering of Shares will include a form of the prospectus for the Fund
that may be downloaded The website will include the Sharesrsquo ticker CUSIP and
exchange information along with additional quantitative information updated on a daily
basis including for the Fund (1) daily trading volume the prior business dayrsquos reported
NAV and closing price mid-point of the bidask spread at the time of calculation of such
NAV (the ldquoBidAsk Pricerdquo)33 and a calculation of the premium and discount of the
BidAsk Price against the NAV and (2) data in chart format displaying the frequency
distribution of discounts and premiums of the daily BidAsk Price against the NAV
within appropriate ranges for each of the four previous calendar quarters On each
business day before commencement of trading in Shares in the Regular Market Session34
33 The BidAsk Price of the Fund will be determined using the mid-point of the highest bid and the lowest offer on the Exchange as of the time of calculation of the Fundrsquos NAV The records relating to BidAsk Prices will be retained by the Fund and its service providers
34 See Nasdaq Rule 4120(b)(4) (describing the three trading sessions on the Exchange (1) Pre-Market Session from 4 am to 930 am Eastern Time (2)
SR-NASDAQ-2015-011 Amendment No 2 Page 50 of 64
on the Exchange the Fund will disclose on its website the identities and quantities of the
portfolio of securities and other assets (the ldquoDisclosed Portfoliordquo as defined in Nasdaq
Rule 5735(c)(2)) held by the Fund that will form the basis for the Fundrsquos calculation of
NAV at the end of the business day 35 The Fundrsquos disclosure of derivative positions in
the Disclosed Portfolio will include information that market participants can use to value
these positions intraday On a daily basis the Fund will disclose on the Fundrsquos website
the following information regarding each portfolio holding as applicable to the type of
holding ticker symbol CUSIP number or other identifier if any a description of the
holding (including the type of holding) the identity of the security or other asset or
instrument underlying the holding if any for options the option strike price quantity
held (as measured by for example par value notional value or number of shares
contracts or units) maturity date if any coupon rate if any effective date if any market
value of the holding and percentage weighting of the holding in the Fundrsquos portfolio
The website information will be publicly available at no charge
In addition for the Fund an estimated value defined in Rule 5735(c)(3) as the
ldquoIntraday Indicative Valuerdquo that reflects an estimated intraday value of the Fundrsquos
Disclosed Portfolio will be disseminated Moreover the Intraday Indicative Value
Regular Market Session from 930 am to 4 pm or 415 pm Eastern Time and (3) Post-Market Session from 4 pm or 415 pm to 8 pm Eastern Time)
Under accounting procedures to be followed by the Fund trades made on the prior business day (ldquoTrdquo) will be booked and reflected in NAV on the current business day (ldquoT+1rdquo) Accordingly the Fund will be able to disclose at the beginning of the business day the portfolio that will form the basis for the NAV calculation at the end of the business day
35
SR-NASDAQ-2015-011 Amendment No 2 Page 51 of 64
available on the NASDAQ OMX Information LLC proprietary index data service36 will
be based upon the current value for the components of the Disclosed Portfolio and will be
updated and widely disseminated by one or more major market data vendors and broadly
displayed at least every 15 seconds during the Regular Market Session The Intraday
Indicative Value will be based on quotes and closing prices from the securitiesrsquo local
market and may not reflect events that occur subsequent to the local marketrsquos close
Premiums and discounts between the Intraday Indicative Value and the market price may
occur This should not be viewed as a ldquoreal timerdquo update of the NAV per Share of the
Fund which is calculated only once a day
The dissemination of the Intraday Indicative Value together with the Disclosed
Portfolio will allow investors to determine the value of the underlying portfolio of the
Fund on a daily basis and will provide a close estimate of that value throughout the
trading day
Investors will also be able to obtain the Fundrsquos Statement of Additional
Information (ldquoSAIrdquo) the Fundrsquos annual and semi-annual reports (together ldquoShareholder
Reportsrdquo) and its Form N-CSR and Form N-SAR filed twice a year The Fundrsquos SAI
and Shareholder Reports will be available free upon request from the Fund and those
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or
downloaded from the Commissionrsquos website at wwwsecgov Information regarding
Currently the NASDAQ OMX Global Index Data Service (ldquoGIDSrdquo) is the NASDAQ OMX global index data feed service offering real-time updates daily summary messages and access to widely followed indexes and Intraday Indicative Values for ETFs GIDS provides investment professionals with the daily information needed to track or trade NASDAQ OMX indexes listed ETFs or third-party partner indexes and ETFs
36
SR-NASDAQ-2015-011 Amendment No 2 Page 52 of 64
market price and trading volume of the Shares will be continually available on a real-time
basis throughout the day on brokersrsquo computer screens and other electronic services
Information regarding the previous dayrsquos closing price and trading volume information
for the Shares will be published daily in the financial section of newspapers Quotation
and last sale information for the Shares will be available via Nasdaq proprietary quote
and trade services as well as in accordance with the Unlisted Trading Privileges and the
Consolidated Tape Association (ldquoCTArdquo) plans for the Shares Quotation and last sale
information for the other ETFs in which the Fund will invest will be available via the
quote and trade services of their respective primary exchanges as well as in accordance
with the Unlisted Trading Privileges and the CTA plans as applicable Quotation and
last sale information for US exchange-traded options will be available via the Options
Price Reporting Authority Intraday executable price quotations on Floating Rate Debt
Instruments and other assets not traded on an exchange will be available from major
broker-dealer firms or market data vendors as well as from automated quotation systems
published or other public sources or online information services Additionally the Trade
Reporting and Compliance Engine (ldquoTRACErdquo) of the Financial Industry Regulatory
Authority (ldquoFINRArdquo) will be a source of price information for corporate bonds
privately-issued securities mortgage-backed securities and asset-backed securities to the
extent transactions in such securities are reported to TRACE37 For exchange-traded
Broker-dealers that are FINRA member firms have an obligation to report transactions in specified debt securities to TRACE to the extent required under applicable FINRA rules Generally such debt securities will have at issuance a maturity that exceeds one calendar year
37
SR-NASDAQ-2015-011 Amendment No 2 Page 53 of 64
assets intraday pricing information will be available directly from the applicable listing
exchange
Additional information regarding the Fund and the Shares including investment
strategies risks creation and redemption procedures fees Fund holdings disclosure
policies distributions and taxes will be included in the Registration Statement
Initial and Continued Listing
The Shares will be subject to Rule 5735 which sets forth the initial and continued
listing criteria applicable to Managed Fund Shares The Exchange represents that for
initial andor continued listing the Fund must be in compliance with Rule 10A-338 under
the Act A minimum of 100000 Shares will be outstanding at the commencement of
trading on the Exchange The Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the NAV and the
Disclosed Portfolio will be made available to all market participants at the same time
Trading Halts
With respect to trading halts the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading in the Shares of the Fund Nasdaq will
halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12) Trading may be
halted because of market conditions or for reasons that in the view of the Exchange
make trading in the Shares inadvisable These may include (1) the extent to which
trading is not occurring in the securities andor the other assets constituting the Disclosed
Portfolio of the Fund or (2) whether other unusual conditions or circumstances
See 17 CFR 24010A-3 38
SR-NASDAQ-2015-011 Amendment No 2 Page 54 of 64
detrimental to the maintenance of a fair and orderly market are present Trading in the
Shares also will be subject to Rule 5735(d)(2)(D) which sets forth circumstances under
which Shares of the Fund may be halted
Trading Rules
Nasdaq deems the Shares to be equity securities thus rendering trading in the
Shares subject to Nasdaqrsquos existing rules governing the trading of equity securities
Nasdaq will allow trading in the Shares from 400 am until 800 pm Eastern Time
The Exchange has appropriate rules to facilitate transactions in the Shares during all
trading sessions As provided in Nasdaq Rule 5735(b)(3) the minimum price variation
for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $001
Surveillance
The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws39 The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities laws
The surveillances referred to above generally focus on detecting securities trading
outside their normal patterns which could be indicative of manipulative or other violative
activity When such situations are detected surveillance analysis follows and
FINRA surveils trading on the Exchange pursuant to a regulatory services agreement The Exchange is responsible for FINRArsquos performance under this regulatory services agreement
39
SR-NASDAQ-2015-011 Amendment No 2 Page 55 of 64
investigations are opened where appropriate to review the behavior of all relevant
parties for all relevant trading violations
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 56 of 64
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
SR-NASDAQ-2015-011 Amendment No 2 Page 57 of 64
2 Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
SR-NASDAQ-2015-011 Amendment No 2 Page 58 of 64
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
SR-NASDAQ-2015-011 Amendment No 2 Page 59 of 64
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
SR-NASDAQ-2015-011 Amendment No 2 Page 60 of 64
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 61 of 64
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
SR-NASDAQ-2015-011 Amendment No 2 Page 62 of 64
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
B Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
C Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received From Members Participants or Others
Written comments were neither solicited nor received
III Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Within 45 days of the date of publication of this notice in the Federal Register or
within such longer period (i) as the Commission may designate up to 90 days of such date
if it finds such longer period to be appropriate and publishes its reasons for so finding or
(ii) as to which the Exchange consents the Commission shall (a) by order approve or
disapprove such proposed rule change or (b) institute proceedings to determine whether
the proposed rule change should be disapproved
SR-NASDAQ-2015-011 Amendment No 2 Page 63 of 64
IV Solicitation of Comments
Interested persons are invited to submit written data views and arguments
concerning the foregoing including whether the proposed rule change is consistent with
the Act Comments may be submitted by any of the following methods
Electronic comments
bull Use the Commissionrsquos Internet comment form
(httpwwwsecgovrulessroshtml) or
bull Send an e-mail to rule-commentssecgov Please include File Number
SR-NASDAQ-2015-011 on the subject line
Paper comments
bull Send paper comments in triplicate to Brent J Fields Secretary Securities and
Exchange Commission Station Place 100 F Street NE Washington DC
20549-9303
All submissions should refer to File Number SR-NASDAQ-2015-011 This file number
should be included on the subject line if e-mail is used To help the Commission process
and review your comments more efficiently please use only one method The
Commission will post all comments on the Commissionrsquos Internet website
httpwwwsecgovrulessroshtml
Copies of the submission all subsequent amendments all written statements with
respect to the proposed rule change that are filed with the Commission and all written
communications relating to the proposed rule change between the Commission and any
person other than those that may be withheld from the public in accordance with the
provisions of 5 USC 552 will be available for website viewing and printing in the
Commissionrsquos Public Reference Room 100 F Street NE Washington DC 20549 on
SR-NASDAQ-2015-011 Amendment No 2 Page 64 of 64
official business days between the hours of 1000 am and 300 pm Copies of the filing
also will be available for inspection and copying at the principal office of Nasdaq All
comments received will be posted without change the Commission does not edit
personal identifying information from submissions You should submit only information
that you wish to make available publicly
All submissions should refer to File Number SR-NASDAQ-2015-011 and should
be submitted on or before [insert date 21 days from publication in the Federal Register]
For the Commission by the Division of Trading and Markets pursuant to
delegated authority41
Kevin M OrsquoNeill Deputy Secretary
17 CFR 20030-3(a)(12) 41
SR-NASDAQ-2015-011 Amendment No 2 Page 31 of 64
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
4 Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
5 Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received from Members Participants or Others
Written comments were neither solicited nor received
6 Extension of Time Period for Commission Action
The Exchange does not consent at this time to an extension of any time period for
Commission action
7 Basis for Summary Effectiveness Pursuant to Section 19(b)(3) or for Accelerated Effectiveness Pursuant to Section 19(b)(2)
Not applicable
8 Proposed Rule Change Based on Rules of Another Self-Regulatory Organization or of the Commission
Not applicable
9 Security-Based Swap Submissions Filed Pursuant to Section 3C of the Act
Not applicable
SR-NASDAQ-2015-011 Amendment No 2 Page 32 of 64
10 Advance Notices Filed Pursuant to Section 806(e) of the Payment Clearing and Settlement Supervision Act
Not applicable
11 Exhibits
1 Completed notice of proposed rule change for publication in the Federal
Register
SR-NASDAQ-2015-011 Amendment No 2 Page 33 of 64
EXHIBIT 1
SECURITIES AND EXCHANGE COMMISSION (Release No 34shy File No SR-NASDAQ-2015-011)
April __ 2015
Self-Regulatory Organizations The NASDAQ Stock Market LLC Notice of Filing of Proposed Rule Change Relating to the Listing and Trading of the Shares of the First Trust Strategic Floating Rate ETF of First Trust Exchange-Traded Fund IV
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (ldquoActrdquo)1 and
Rule 19b-4 thereunder2 notice is hereby given that on February 12 2015 The NASDAQ
Stock Market LLC (ldquoNasdaqrdquo or the ldquoExchangerdquo) filed with the Securities and Exchange
Commission (ldquoCommissionrdquo) the proposed rule change as described in in Items I II and
III below which Items have been prepared by Nasdaq On April 6 2015 Nasdaq filed
Amendment No 1 which replaced the text of the original filing in its entirety On April
15 2015 Nasdaq filed Amendment No 2 which replaced the text of the original filing in
its entirety The Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons
I Self-Regulatory Organizationrsquos Statement of the Terms of Substance of the Proposed Rule Change
Nasdaq proposes to list and trade the shares of the First Trust Strategic Floating
Rate ETF (the ldquoFundrdquo) of the First Trust Strategic Floating Rate ETF (the ldquoFundrdquo) of
First Trust Exchange-Traded Fund IV (the ldquoTrustrdquo) under Nasdaq Rule 5735 (ldquoManaged
1 15 USC 78s(b)(1)
2 17 CFR 24019b-4
SR-NASDAQ-2015-011 Amendment No 2 Page 34 of 64
Fund Sharesrdquo)3 The shares of the Fund are collectively referred to herein as the
ldquoSharesrdquo
The text of the proposed rule change is available at
httpnasdaqcchwallstreetcom at Nasdaqrsquos principal office and at the Commissionrsquos
Public Reference Room
II Self-Regulatory Organizationrsquos Statement of the Purpose of and Statutory Basis for the Proposed Rule Change
In its filing with the Commission Nasdaq included statements concerning the
purpose of and basis for the proposed rule change The text of these statements may be
examined at the places specified in Item IV below Nasdaq has prepared summaries set
forth in Sections A B and C below of the most significant aspects of such statements
A Self-Regulatory Organizationrsquos Statement of the Purpose of and Statutory Basis for the Proposed Rule Change
1 Purpose
The Exchange proposes to list and trade the Shares of the Fund under Nasdaq
Rule 5735 which governs the listing and trading of Managed Fund Shares4 on the
3 The Commission approved Nasdaq Rule 5735 in Securities Exchange Act Release No 57962 (June 13 2008) 73 FR 35175 (June 20 2008) (SR-NASDAQ-2008shy039) There are already multiple actively-managed funds listed on the Exchange see eg Securities Exchange Act Release Nos 69464 (April 26 2013) 78 FR 25774 (May 2 2013) (SR-NASDAQ-2013-036) (order approving listing and trading of First Trust Senior Loan Fund) 68972 (February 22 2013) 78 FR 13721 (February 28 2013) (SR-NASDAQ-2012-147) (order approving listing and trading of First Trust High Yield LongShort ETF) 66489 (February 29 2012) 77 FR 13379 (March 6 2012) (SR-NASDAQ-2012-004) (order approving listing and trading of WisdomTree Emerging Markets Corporate Bond Fund) The Exchange believes the proposed rule change raises no significant issues not previously addressed in those prior Commission orders
4 A Managed Fund Share is a security that represents an interest in an investment company registered under the Investment Company Act of 1940 (15 USC 80ashy
SR-NASDAQ-2015-011 Amendment No 2 Page 35 of 64
Exchange The Fund will be an actively-managed exchange-traded fund (ldquoETFrdquo) The
Shares will be offered by the Trust which was established as a Massachusetts business
trust on September 15 20105 The Trust is registered with the Commission as an
investment company and has filed a registration statement on Form N-1A (ldquoRegistration
Statementrdquo) with the Commission6 The Fund will be a series of the Trust The Fund
intends to qualify each year as a regulated investment company (ldquoRICrdquo) under
Subchapter M of the Internal Revenue Code of 1986 as amended
First Trust Advisors LP will be the investment adviser (ldquoAdviserrdquo) to the Fund
First Trust Portfolios LP (the ldquoDistributorrdquo) will be the principal underwriter and
distributor of the Fundrsquos Shares The Bank of New York Mellon Corporation (ldquoBNYrdquo)
will act as the administrator accounting agent custodian and transfer agent to the Fund
1) (the ldquo1940 Actrdquo) organized as an open-end investment company or similar entity that invests in a portfolio of securities selected by its investment adviser consistent with its investment objectives and policies In contrast an open-end investment company that issues Index Fund Shares listed and traded on the Exchange under Nasdaq Rule 5705 seeks to provide investment results that correspond generally to the price and yield performance of a specific foreign or domestic stock index fixed income securities index or combination thereof
5 The Commission has issued an order upon which the Trust may rely granting certain exemptive relief under the 1940 Act See Investment Company Act Release No 30029 (April 10 2012) (File No 812-13795) (the ldquoExemptive Reliefrdquo) In addition the Commission has issued no-action relief upon which the Trust may rely pertaining to the Fundrsquos ability to invest in derivatives notwithstanding certain representations in the application for the Exemptive Relief See Commission No-Action Letter (December 6 2012)
6 See Post-Effective Amendment No 104 to Registration Statement on Form N-1A for the Trust dated January 29 2015 (File Nos 333-174332 and 811-22559) The descriptions of the Fund and the Shares contained herein are based in part on information in the Registration Statement
7
SR-NASDAQ-2015-011 Amendment No 2 Page 36 of 64
Paragraph (g) of Rule 5735 provides that if the investment adviser to the
investment company issuing Managed Fund Shares is affiliated with a broker-dealer
such investment adviser shall erect a ldquofire wallrdquo between the investment adviser and the
broker-dealer with respect to access to information concerning the composition andor
changes to such investment company portfolio7 In addition paragraph (g) further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio Rule 5735(g) is similar
to Nasdaq Rule 5705(b)(5)(A)(i) however paragraph (g) in connection with the
establishment of a ldquofire wallrdquo between the investment adviser and the broker-dealer
reflects the applicable open-end fundrsquos portfolio not an underlying benchmark index as
is the case with index-based funds The Adviser is not a broker-dealer although it is
affiliated with the Distributor a broker-dealer The Adviser has implemented a fire wall
An investment adviser to an open-end fund is required to be registered under the Investment Advisers Act of 1940 (the ldquoAdvisers Actrdquo) As a result the Adviser and its related personnel are subject to the provisions of Rule 204A-1 under the Advisers Act relating to codes of ethics This Rule requires investment advisers to adopt a code of ethics that reflects the fiduciary nature of the relationship to clients as well as compliance with other applicable securities laws Accordingly procedures designed to prevent the communication and misuse of non-public information by an investment adviser must be consistent with Rule 204A-1 under the Advisers Act In addition Rule 206(4)-7 under the Advisers Act makes it unlawful for an investment adviser to provide investment advice to clients unless such investment adviser has (i) adopted and implemented written policies and procedures reasonably designed to prevent violation by the investment adviser and its supervised persons of the Advisers Act and the Commission rules adopted thereunder (ii) implemented at a minimum an annual review regarding the adequacy of the policies and procedures established pursuant to subparagraph (i) above and the effectiveness of their implementation and (iii) designated an individual (who is a supervised person) responsible for administering the policies and procedures adopted under subparagraph (i) above
8
SR-NASDAQ-2015-011 Amendment No 2 Page 37 of 64
with respect to its broker-dealer affiliate regarding access to information concerning the
composition andor changes to the portfolio In addition personnel who make decisions
on the Fundrsquos portfolio composition will be subject to procedures designed to prevent the
use and dissemination of material non-public information regarding the Fundrsquos portfolio
In the event (a) the Adviser becomes or becomes newly affiliated with a broker-dealer
or (b) any new adviser or sub-adviser is a registered broker-dealer or becomes affiliated
with another broker-dealer it will implement a fire wall with respect to its relevant
personnel andor such broker-dealer affiliate as applicable regarding access to
information concerning the composition andor changes to the portfolio and will be
subject to procedures designed to prevent the use and dissemination of material
non-public information regarding such portfolio The Fund does not currently intend to
use a sub-adviser
First Trust Strategic Floating Rate ETF
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions8 at least 80 of its
The term ldquounder normal market conditionsrdquo as used herein includes but is not limited to the absence of adverse market economic political or other conditions including extreme volatility or trading halts in the fixed income markets or the financial markets generally operational issues causing dissemination of inaccurate market information or force majeure type events such as systems failure natural or man-made disaster act of God armed conflict act of terrorism riot or labor disruption or any similar intervening circumstance For temporary defensive purposes during the initial invest-up period and during periods of high cash inflows or outflows the Fund may depart from its principal investment strategies for example it may hold a higher than normal proportion of its assets in cash During such periods the Fund may not be able to achieve its investment objective The Fund may adopt a defensive strategy when the Adviser believes securities in which the Fund normally invests have elevated risks due to political or economic factors and in other extraordinary circumstances
SR-NASDAQ-2015-011 Amendment No 2 Page 38 of 64
net assets in a portfolio of the following types of floating-rate9 debt instruments issued by
US and non-US public- and private-sector entities floating-rate corporate10 and
government bonds and notes floating-rate agency securities 11 floating-rate instruments
of non-US issuers floating-rate privately-issued securities 12 floating-rate asset-backed
securities 13 floating-rate mortgage-backed securities14 floating-rate loans 15 and
9 For the avoidance of doubt the term ldquofloating-raterdquo shall also include similar terms such as ldquovariable-raterdquo and ldquoadjustable-raterdquo
10 The Adviser expects that under normal market conditions generally for a corporate bond to be considered as an eligible investment after taking into account such an investment at least 75 of the Fundrsquos net assets that are invested in floating-rate corporate bonds and as described below fixed-rate corporate bonds (in the aggregate) will be comprised of corporate bonds that have at the time of original issuance $100 million or more par amount outstanding
11 ldquoAgency securitiesrdquo for these purposes generally includes securities issued by the following entities Government National Mortgage Association (Ginnie Mae) Federal National Mortgage Association (Fannie Mae) Federal Home Loan Banks (FHLBanks) Federal Home Loan Mortgage Corporation (Freddie Mac) Farm Credit System (FCS) Farm Credit Banks (FCBanks) Student Loan Marketing Association (Sallie Mae) Resolution Funding Corporation (REFCORP) Financing Corporation (FICO) and the Farm Credit System (FCS) Financial Assistance Corporation (FAC) Agency securities can include but are not limited to mortgage-backed securities
12 ldquoPrivately-issued securitiesrdquo for these purposes generally includes Rule 144A securities other than mortgage-backed Rule 144A securities Under normal market conditions privately-issued securities will have at the time of original issuance $100 million or more principal amount outstanding to be considered eligible investments
13 Asset-backed securities are securities that are backed by a pool of assets The Fund currently intends to invest in asset-backed securities that are consumer asset-backed securities
14 Mortgage-backed securities which are securities that directly or indirectly represent a participation in or are secured by and payable from mortgage loans on real property will consist of (1) residential mortgage-backed securities (ldquoRMBSrdquo) (2) commercial mortgage-backed securities (ldquoCMBSrdquo) (3) stripped mortgage-backed securities (ldquoSMBSrdquo) which are mortgage-backed securities
SR-NASDAQ-2015-011 Amendment No 2 Page 39 of 64
investment companies16 (including investment companies advised by the Adviser) that
invest primarily in the foregoing types of debt instruments17 (collectively ldquoFloating Rate
Debt Instrumentsrdquo)
where mortgage payments are divided between paying the loanrsquos principal and paying the loanrsquos interest (4) collateralized mortgage obligations (ldquoCMOsrdquo) and real estate mortgage investment conduits (ldquoREMICsrdquo) which are mortgage-backed securities that are divided into multiple classes with each class being entitled to a different share of the principal and interest payments received from the pool of underlying assets
15 The floating-rate loans in which the Fund will invest will represent amounts borrowed by companies or other entities from banks and other lenders and a significant portion of such floating-rate loans may be rated below investment grade or unrated Floating-rate loans held by the Fund may be senior or subordinate obligations of the borrower and may or may not be secured by collateral First lien senior secured floating-rate loans are referred to herein as ldquosenior loansrdquo Floating-rate loans that are not senior loans (ie unsecured floating-rate loans and secured floating-rate loans that are not first lien floating-rate loans) are referred to herein as ldquojunior loansrdquo The Fund will generally invest in floating-rate loans that the Adviser deems to be liquid with readily available prices notwithstanding the foregoing the Fund may invest in floating-rate loans that are deemed illiquid so long as the Fund complies with the 15 limitation on investments of its net assets in illiquid assets described below under ldquoInvestment Restrictionsrdquo
16 The Fund currently anticipates investing only in registered open-end investment companies that are listed and traded in the US on registered exchanges (ie other ETFs) An ETF is an investment company registered under the 1940 Act that holds a portfolio of securities Many ETFs are designed to track the performance of a securities index including industry sector country and region indexes The Fund may invest in the securities of ETFs in excess of the limits imposed under the 1940 Act pursuant to exemptive orders obtained by other ETFs and their sponsors from the Commission In addition the Fund may invest in the securities of certain investment companies in excess of the limits imposed under the 1940 Act pursuant to an exemptive order obtained by the Trust and the Adviser from the Commission See Investment Company Act Release No 30377 (February 5 2013) (File No 812-13895) The ETFs in which the Fund may invest include Index Fund Shares (as described in Nasdaq Rule 5705) Portfolio Depository Receipts (as described in Nasdaq Rule 5705) and Managed Fund Shares (as described in Nasdaq Rule 5735) While the Fund may invest in inverse ETFs the Fund will not invest in leveraged or inverse leveraged (eg 2X or -3X) ETFs
SR-NASDAQ-2015-011 Amendment No 2 Page 40 of 64
At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade To be considered
ldquoinvestment graderdquo under normal market conditions rated Floating Rate Debt
Instruments will carry at the time of purchase a rating in the highest four rating
categories of at least one nationally recognized statistical ratings organization
(ldquoNRSROrdquo) (eg BBB- or higher by Standard amp Poorrsquos Ratings Services (ldquoSampPrdquo)
andor Fitch Ratings (ldquoFitchrdquo) or Baa3 or higher by Moodyrsquos Investors Service Inc
(ldquoMoodyrsquosrdquo)18 For unrated securities to be considered ldquoinvestment graderdquo under normal
market conditions such securities will be determined at the time of purchase to be of
comparable quality19 by the Adviser The Fund may invest up to 35 of its net assets in
securities that are at the time of investment rated below investment grade by each
NRSRO rating such securities (or securities that are unrated and determined by the
17 The liquidity of a security especially in the case of asset-backed and mortgage-backed securities will be a substantial factor in the Fundrsquos security selection process Consistent with the discussion below under ldquoInvestment Restrictionsrdquo the Fund will not purchase any Floating Rate Debt Instruments (including asset-backed securities and mortgage-backed securities) that in the Adviserrsquos opinion are illiquid if as a result more than 15 of the value of the Fundrsquos net assets will be invested in illiquid assets
18 For the avoidance of doubt if a security is rated by multiple NRSROs and receives different ratings the Fund will treat the security as being rated in the highest rating category received from an NRSRO
19 Comparable quality of unrated securities will be determined by the Adviser based on fundamental credit analysis of the unrated security and comparable NRSRO-rated securities On a best efforts basis the Adviser will attempt to make a rating determination based on publicly available data In making a ldquocomparable qualityrdquo determination the Adviser may consider for example whether the issuer of the security has issued other rated securities the nature and provisions of the relevant security whether the obligations under the relevant security are guaranteed by another entity and the rating of such guarantor (if any) relevant cash flows macroeconomic analysis andor sector or industry analysis
SR-NASDAQ-2015-011 Amendment No 2 Page 41 of 64
Adviser to be of comparable quality) commonly referred to as ldquohigh yieldrdquo or ldquojunkrdquo
bonds If subsequent to purchase by the Fund a security held by the Fund experiences a
decline in credit quality and falls below investment grade the Fund may continue to hold
the security and it will not cause the Fund to violate the 35 investment limitation
however the security will be taken into account for purposes of determining whether
purchases of additional securities will cause the Fund to violate such limitation
The Fund will limit its investments in asset-backed securities (excluding agency
mortgage-backed securities) and non-agency mortgage-backed securities (in the
aggregate) to 20 of its net assets20 In addition the Fund will limit its investments in
junior loans to 20 of its net assets
The Fund will hold debt securities (including in the aggregate Floating Rate
Debt Instruments and the fixed-rate debt securities described below) of at least 13
non-affiliated issuers
Other Investments
Under normal market conditions the Fund will invest primarily in the Floating
Rate Debt Instruments described above to meet its investment objective In addition the
Fund may invest up to 20 of its net assets in the following types of fixed-rate debt
securities corporate21 and government bonds and notes agency securities22 instruments
20 For the avoidance of doubt there is no limitation on the Fundrsquos investments in agency mortgage-backed securities
21 See footnote 10 above
22 See footnote 11 above
SR-NASDAQ-2015-011 Amendment No 2 Page 42 of 64
of non-US issuers in developed markets privately-issued securities 23 asset-backed
securities 24 mortgage-backed securities 25 municipal bonds money market securities26
and investment companies27 (including investment companies advised by the Adviser)
that invest primarily in the foregoing types of debt securities
Further to pursue its investment objective the Fund may invest up to 20 of the
value of its net assets in exchange-listed options on US Treasury futures contracts and
exchange-listed US Treasury futures contracts28 The use of these derivative
transactions may allow the Fund to obtain net long or short exposures to selected interest
rates These derivatives may also be used to hedge risks including interest rate risks and
credit risks associated with the Fundrsquos portfolio investments The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
23 See footnote 12 above
24 See footnote 13 above
25 See footnote 14 above
26 ldquoMoney market securitiesrdquo for these purposes generally includes short-term high-quality obligations issued or guaranteed by the US Treasury or the agencies or instrumentalities of the US government short-term high-quality securities issued or guaranteed by non-US governments agencies and instrumentalities repurchase agreements commercial paper (both asset-backed and non-assetshybacked) and deposits and other obligations of US and non-US banks and financial institutions
27 See footnote 16 above
28 At least 90 of the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be invested in instruments that trade in markets that are members of the Intermarket Surveillance Group (ldquoISGrdquo) (see footnote 40 below) or are parties to a comprehensive surveillance sharing agreement with the Exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 43 of 64
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index
Investment Restrictions
The Fund will not invest 25 or more of the value of its total assets in securities
of issuers in any one industry This restriction does not apply to (a) obligations issued or
guaranteed by the US government its agencies or instrumentalities or (b) securities of
other investment companies29
The Fund may hold up to an aggregate amount of 15 of its net assets in illiquid
assets (calculated at the time of investment) including Rule 144A securities deemed
illiquid by the Adviser30 The Fund will monitor its portfolio liquidity on an ongoing
basis to determine whether in light of current circumstances an adequate level of
liquidity is being maintained and will consider taking appropriate steps in order to
maintain adequate liquidity if through a change in values net assets or other
circumstances more than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid
assets include securities subject to contractual or other restrictions on resale and other
29 See Form N-1A Item 9 The Commission has taken the position that a fund is concentrated if it invests more than 25 of the value of its total assets in any one industry See eg Investment Company Act Release No 9011 (October 30 1975) 40 FR 54241 (November 21 1975)
30 In reaching liquidity decisions the Adviser may consider the following factors the frequency of trades and quotes for the security the number of dealers wishing to purchase or sell the security and the number of other potential purchasers dealer undertakings to make a market in the security and the nature of the security and the nature of the marketplace in which it trades (eg the time needed to dispose of the security the method of soliciting offers and the mechanics of transfer)
SR-NASDAQ-2015-011 Amendment No 2 Page 44 of 64
instruments that lack readily available markets as determined in accordance with
Commission staff guidance31
The Fund will not invest in non-US equity securities
Creation and Redemption of Shares
The Fund will issue and redeem Shares on a continuous basis at net asset value
(ldquoNAVrdquo)32 only in large blocks of Shares (ldquoCreation Unitsrdquo) in transactions with
authorized participants generally including broker-dealers and large institutional
investors (ldquoAuthorized Participantsrdquo) Creation Units generally will consist of 50000
Shares although this may change from time to time Creation Units however are not
expected to consist of less than 50000 Shares As described in the Registration
Statement and consistent with the Exemptive Relief the Fund will issue and redeem
Creation Units in exchange for an in-kind portfolio of instruments andor cash in lieu of
31 The Commission has stated that long-standing Commission guidelines have required open-end funds to hold no more than 15 of their net assets in illiquid securities and other illiquid assets See Investment Company Act Release No 28193 (March 11 2008) 73 FR 14618 (March 18 2008) footnote 34 See also Investment Company Act Release No 5847 (October 21 1969) 35 FR 19989 (December 31 1970) (Statement Regarding ldquoRestricted Securitiesrdquo) Investment Company Act Release No 18612 (March 12 1992) 57 FR 9828 (March 20 1992) (Revisions of Guidelines to Form N-1A) A fundrsquos portfolio security is illiquid if it cannot be disposed of in the ordinary course of business within seven days at approximately the value ascribed to it by the fund See Investment Company Act Release No 14983 (March 12 1986) 51 FR 9773 (March 21 1986) (adopting amendments to Rule 2a-7 under the 1940 Act) Investment Company Act Release No 17452 (April 23 1990) 55 FR 17933 (April 30 1990) (adopting Rule 144A under the Securities Act of 1933)
32 The NAV of the Fundrsquos Shares generally will be calculated once daily Monday through Friday as of the close of regular trading on the New York Stock Exchange generally 400 pm Eastern Time (the ldquoNAV Calculation Timerdquo) NAV per Share will be calculated by dividing the Fundrsquos net assets by the number of Fund Shares outstanding For more information regarding the valuation of Fund investments in calculating the Fundrsquos NAV see the Registration Statement
SR-NASDAQ-2015-011 Amendment No 2 Page 45 of 64
such instruments (the ldquoCreation Basketrdquo) In addition if there is a difference between the
NAV attributable to a Creation Unit and the market value of the Creation Basket
exchanged for the Creation Unit the party conveying instruments with the lower value
will pay to the other an amount in cash equal to the difference (referred to as the ldquoCash
Componentrdquo)
Creations and redemptions must be made by or through an Authorized Participant
that has executed an agreement that has been agreed to by the Distributor and BNY with
respect to creations and redemptions of Creation Units All standard orders to create
Creation Units must be received by the transfer agent no later than the closing time of the
regular trading session on the New York Stock Exchange (ordinarily 400 pm Eastern
Time) (the ldquoClosing Timerdquo) in each case on the date such order is placed in order for the
creation of Creation Units to be effected based on the NAV of Shares as next determined
on such date after receipt of the order in proper form Shares may be redeemed only in
Creation Units at their NAV next determined after receipt not later than the Closing Time
of a redemption request in proper form by the Fund through the transfer agent and only
on a business day
The Fundrsquos custodian through the National Securities Clearing Corporation will
make available on each business day prior to the opening of business of the Exchange
the list of the names and quantities of the instruments comprising the Creation Basket as
well as the estimated Cash Component (if any) for that day The published Creation
Basket will apply until a new Creation Basket is announced on the following business
day prior to commencement of trading in the Shares
SR-NASDAQ-2015-011 Amendment No 2 Page 46 of 64
Net Asset Value
The Fundrsquos NAV will be determined as of the close of trading (normally
400 pm Eastern Time) on each day the New York Stock Exchange is open for
business NAV will be calculated for the Fund by taking the market price of the Fundrsquos
total assets including interest or dividends accrued but not yet collected less all
liabilities and dividing such amount by the total number of Shares outstanding The
result rounded to the nearest cent will be the NAV per Share All valuations will be
subject to review by the Board of Trustees of the Trust (ldquoTrust Boardrdquo) or its delegate
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with valuation procedures (which may be revised from time to time) adopted by the Trust
Board (the ldquoValuation Proceduresrdquo) and in accordance with the 1940 Act A market
valuation generally means a valuation (i) obtained from an exchange an independent
pricing service (ldquoPricing Servicerdquo) or a major market maker (or dealer) or (ii) based on a
price quotation or other equivalent indication of value supplied by an exchange a Pricing
Service or a major market maker (or dealer) The information summarized below is
based on the Valuation Procedures as currently in effect however as noted above the
Valuation Procedures are amended from time to time and therefore such information is
subject to change
Certain securities including Floating Rate Debt Instruments in which the Fund
may invest will not be listed on any securities exchange or board of trade Such
securities will typically be bought and sold by institutional investors in individually
negotiated private transactions that function in many respects like an over-the-counter
SR-NASDAQ-2015-011 Amendment No 2 Page 47 of 64
secondary market although typically no formal market makers will exist Certain
securities particularly debt securities will have few or no trades or trade infrequently
and information regarding a specific security may not be widely available or may be
incomplete Accordingly determinations of the fair value of debt securities may be
based on infrequent and dated information Because there is less reliable objective data
available elements of judgment may play a greater role in valuation of debt securities
than for other types of securities Typically Floating Rate Debt Instruments and other
debt securities in which the Fund may invest (other than those described below) will be
valued using information provided by a Pricing Service Debt securities having a
remaining maturity of 60 days or less when purchased will be valued at cost adjusted for
amortization of premiums and accretion of discounts provided the Adviserrsquos pricing
committee (the ldquoPricing Committeerdquo) has determined that the use of amortized cost is an
appropriate reflection of fair value given market and issuer-specific conditions existing at
the time of the determination Overnight repurchase agreements will be valued at cost
and term repurchase agreements (ie those whose maturity exceeds seven days) will be
valued at the average of the bid quotations obtained daily from at least two recognized
dealers
Asset-backed and mortgage-backed securities will generally be valued by using a
Pricing Service If a Pricing Service does not cover a particular asset-backed or
mortgage-backed security or discontinues covering a particular asset-backed or
mortgage-backed security the security will be priced using broker quotes generally
provided by brokers that make or participate in markets in the security To derive values
Pricing Services and broker-dealers may use matrix pricing and valuation models as well
SR-NASDAQ-2015-011 Amendment No 2 Page 48 of 64
as recent market transactions for the same or similar assets As it deems appropriate the
Pricing Committee may determine that a Pricing Service price does not represent an
accurate value of an asset-backed or mortgage-backed security based on broker quotes it
receives a recent trade in the security by the Fund information from a portfolio manager
or other market information In the event that the Pricing Committee determines that the
Pricing Service price is unreliable or inaccurate based on such other information broker
quotes may be used Additionally if the Pricing Committee determines that the price of
an asset-backed or mortgage-backed security obtained from a Pricing Service and
available broker quotes is unreliable or inaccurate due to market conditions or other
reasons or if a Pricing Service price or broker quote is unavailable the security will be
valued using fair value pricing as described below
Equity securities listed on any exchange other than the Exchange will be valued at
the last sale price on the exchange on which they are principally traded on the business
day as of which such value is being determined Equity securities listed on the Exchange
will be valued at the official closing price on the business day as of which such value is
being determined If there has been no sale on such day or no official closing price in
the case of securities traded on the Exchange the securities will be valued using fair
value pricing as described below Equity securities traded on more than one securities
exchange will be valued at the last sale price or official closing price as applicable on
the business day as of which such value is being determined at the close of the exchange
representing the principal market for such securities
Exchange-traded options and futures contracts will be valued at the closing price
in the market where such contracts are principally traded
SR-NASDAQ-2015-011 Amendment No 2 Page 49 of 64
Certain securities including Floating Rate Debt Instruments in which the Fund
will invest will not be able to be priced by pre-established pricing methods Such
securities may be valued by the Trust Board or its delegate at fair value The use of fair
value pricing by the Fund will be governed by the Valuation Procedures and conducted in
accordance with the provisions of the 1940 Act Valuing the Fundrsquos securities using fair
value pricing will result in using prices for those securities that may differ from current
market valuations or official closing prices on the applicable exchange
Availability of Information
The Fundrsquos website (wwwftportfolioscom) which will be publicly available
prior to the public offering of Shares will include a form of the prospectus for the Fund
that may be downloaded The website will include the Sharesrsquo ticker CUSIP and
exchange information along with additional quantitative information updated on a daily
basis including for the Fund (1) daily trading volume the prior business dayrsquos reported
NAV and closing price mid-point of the bidask spread at the time of calculation of such
NAV (the ldquoBidAsk Pricerdquo)33 and a calculation of the premium and discount of the
BidAsk Price against the NAV and (2) data in chart format displaying the frequency
distribution of discounts and premiums of the daily BidAsk Price against the NAV
within appropriate ranges for each of the four previous calendar quarters On each
business day before commencement of trading in Shares in the Regular Market Session34
33 The BidAsk Price of the Fund will be determined using the mid-point of the highest bid and the lowest offer on the Exchange as of the time of calculation of the Fundrsquos NAV The records relating to BidAsk Prices will be retained by the Fund and its service providers
34 See Nasdaq Rule 4120(b)(4) (describing the three trading sessions on the Exchange (1) Pre-Market Session from 4 am to 930 am Eastern Time (2)
SR-NASDAQ-2015-011 Amendment No 2 Page 50 of 64
on the Exchange the Fund will disclose on its website the identities and quantities of the
portfolio of securities and other assets (the ldquoDisclosed Portfoliordquo as defined in Nasdaq
Rule 5735(c)(2)) held by the Fund that will form the basis for the Fundrsquos calculation of
NAV at the end of the business day 35 The Fundrsquos disclosure of derivative positions in
the Disclosed Portfolio will include information that market participants can use to value
these positions intraday On a daily basis the Fund will disclose on the Fundrsquos website
the following information regarding each portfolio holding as applicable to the type of
holding ticker symbol CUSIP number or other identifier if any a description of the
holding (including the type of holding) the identity of the security or other asset or
instrument underlying the holding if any for options the option strike price quantity
held (as measured by for example par value notional value or number of shares
contracts or units) maturity date if any coupon rate if any effective date if any market
value of the holding and percentage weighting of the holding in the Fundrsquos portfolio
The website information will be publicly available at no charge
In addition for the Fund an estimated value defined in Rule 5735(c)(3) as the
ldquoIntraday Indicative Valuerdquo that reflects an estimated intraday value of the Fundrsquos
Disclosed Portfolio will be disseminated Moreover the Intraday Indicative Value
Regular Market Session from 930 am to 4 pm or 415 pm Eastern Time and (3) Post-Market Session from 4 pm or 415 pm to 8 pm Eastern Time)
Under accounting procedures to be followed by the Fund trades made on the prior business day (ldquoTrdquo) will be booked and reflected in NAV on the current business day (ldquoT+1rdquo) Accordingly the Fund will be able to disclose at the beginning of the business day the portfolio that will form the basis for the NAV calculation at the end of the business day
35
SR-NASDAQ-2015-011 Amendment No 2 Page 51 of 64
available on the NASDAQ OMX Information LLC proprietary index data service36 will
be based upon the current value for the components of the Disclosed Portfolio and will be
updated and widely disseminated by one or more major market data vendors and broadly
displayed at least every 15 seconds during the Regular Market Session The Intraday
Indicative Value will be based on quotes and closing prices from the securitiesrsquo local
market and may not reflect events that occur subsequent to the local marketrsquos close
Premiums and discounts between the Intraday Indicative Value and the market price may
occur This should not be viewed as a ldquoreal timerdquo update of the NAV per Share of the
Fund which is calculated only once a day
The dissemination of the Intraday Indicative Value together with the Disclosed
Portfolio will allow investors to determine the value of the underlying portfolio of the
Fund on a daily basis and will provide a close estimate of that value throughout the
trading day
Investors will also be able to obtain the Fundrsquos Statement of Additional
Information (ldquoSAIrdquo) the Fundrsquos annual and semi-annual reports (together ldquoShareholder
Reportsrdquo) and its Form N-CSR and Form N-SAR filed twice a year The Fundrsquos SAI
and Shareholder Reports will be available free upon request from the Fund and those
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or
downloaded from the Commissionrsquos website at wwwsecgov Information regarding
Currently the NASDAQ OMX Global Index Data Service (ldquoGIDSrdquo) is the NASDAQ OMX global index data feed service offering real-time updates daily summary messages and access to widely followed indexes and Intraday Indicative Values for ETFs GIDS provides investment professionals with the daily information needed to track or trade NASDAQ OMX indexes listed ETFs or third-party partner indexes and ETFs
36
SR-NASDAQ-2015-011 Amendment No 2 Page 52 of 64
market price and trading volume of the Shares will be continually available on a real-time
basis throughout the day on brokersrsquo computer screens and other electronic services
Information regarding the previous dayrsquos closing price and trading volume information
for the Shares will be published daily in the financial section of newspapers Quotation
and last sale information for the Shares will be available via Nasdaq proprietary quote
and trade services as well as in accordance with the Unlisted Trading Privileges and the
Consolidated Tape Association (ldquoCTArdquo) plans for the Shares Quotation and last sale
information for the other ETFs in which the Fund will invest will be available via the
quote and trade services of their respective primary exchanges as well as in accordance
with the Unlisted Trading Privileges and the CTA plans as applicable Quotation and
last sale information for US exchange-traded options will be available via the Options
Price Reporting Authority Intraday executable price quotations on Floating Rate Debt
Instruments and other assets not traded on an exchange will be available from major
broker-dealer firms or market data vendors as well as from automated quotation systems
published or other public sources or online information services Additionally the Trade
Reporting and Compliance Engine (ldquoTRACErdquo) of the Financial Industry Regulatory
Authority (ldquoFINRArdquo) will be a source of price information for corporate bonds
privately-issued securities mortgage-backed securities and asset-backed securities to the
extent transactions in such securities are reported to TRACE37 For exchange-traded
Broker-dealers that are FINRA member firms have an obligation to report transactions in specified debt securities to TRACE to the extent required under applicable FINRA rules Generally such debt securities will have at issuance a maturity that exceeds one calendar year
37
SR-NASDAQ-2015-011 Amendment No 2 Page 53 of 64
assets intraday pricing information will be available directly from the applicable listing
exchange
Additional information regarding the Fund and the Shares including investment
strategies risks creation and redemption procedures fees Fund holdings disclosure
policies distributions and taxes will be included in the Registration Statement
Initial and Continued Listing
The Shares will be subject to Rule 5735 which sets forth the initial and continued
listing criteria applicable to Managed Fund Shares The Exchange represents that for
initial andor continued listing the Fund must be in compliance with Rule 10A-338 under
the Act A minimum of 100000 Shares will be outstanding at the commencement of
trading on the Exchange The Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the NAV and the
Disclosed Portfolio will be made available to all market participants at the same time
Trading Halts
With respect to trading halts the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading in the Shares of the Fund Nasdaq will
halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12) Trading may be
halted because of market conditions or for reasons that in the view of the Exchange
make trading in the Shares inadvisable These may include (1) the extent to which
trading is not occurring in the securities andor the other assets constituting the Disclosed
Portfolio of the Fund or (2) whether other unusual conditions or circumstances
See 17 CFR 24010A-3 38
SR-NASDAQ-2015-011 Amendment No 2 Page 54 of 64
detrimental to the maintenance of a fair and orderly market are present Trading in the
Shares also will be subject to Rule 5735(d)(2)(D) which sets forth circumstances under
which Shares of the Fund may be halted
Trading Rules
Nasdaq deems the Shares to be equity securities thus rendering trading in the
Shares subject to Nasdaqrsquos existing rules governing the trading of equity securities
Nasdaq will allow trading in the Shares from 400 am until 800 pm Eastern Time
The Exchange has appropriate rules to facilitate transactions in the Shares during all
trading sessions As provided in Nasdaq Rule 5735(b)(3) the minimum price variation
for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $001
Surveillance
The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws39 The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities laws
The surveillances referred to above generally focus on detecting securities trading
outside their normal patterns which could be indicative of manipulative or other violative
activity When such situations are detected surveillance analysis follows and
FINRA surveils trading on the Exchange pursuant to a regulatory services agreement The Exchange is responsible for FINRArsquos performance under this regulatory services agreement
39
SR-NASDAQ-2015-011 Amendment No 2 Page 55 of 64
investigations are opened where appropriate to review the behavior of all relevant
parties for all relevant trading violations
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 56 of 64
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
SR-NASDAQ-2015-011 Amendment No 2 Page 57 of 64
2 Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
SR-NASDAQ-2015-011 Amendment No 2 Page 58 of 64
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
SR-NASDAQ-2015-011 Amendment No 2 Page 59 of 64
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
SR-NASDAQ-2015-011 Amendment No 2 Page 60 of 64
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 61 of 64
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
SR-NASDAQ-2015-011 Amendment No 2 Page 62 of 64
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
B Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
C Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received From Members Participants or Others
Written comments were neither solicited nor received
III Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Within 45 days of the date of publication of this notice in the Federal Register or
within such longer period (i) as the Commission may designate up to 90 days of such date
if it finds such longer period to be appropriate and publishes its reasons for so finding or
(ii) as to which the Exchange consents the Commission shall (a) by order approve or
disapprove such proposed rule change or (b) institute proceedings to determine whether
the proposed rule change should be disapproved
SR-NASDAQ-2015-011 Amendment No 2 Page 63 of 64
IV Solicitation of Comments
Interested persons are invited to submit written data views and arguments
concerning the foregoing including whether the proposed rule change is consistent with
the Act Comments may be submitted by any of the following methods
Electronic comments
bull Use the Commissionrsquos Internet comment form
(httpwwwsecgovrulessroshtml) or
bull Send an e-mail to rule-commentssecgov Please include File Number
SR-NASDAQ-2015-011 on the subject line
Paper comments
bull Send paper comments in triplicate to Brent J Fields Secretary Securities and
Exchange Commission Station Place 100 F Street NE Washington DC
20549-9303
All submissions should refer to File Number SR-NASDAQ-2015-011 This file number
should be included on the subject line if e-mail is used To help the Commission process
and review your comments more efficiently please use only one method The
Commission will post all comments on the Commissionrsquos Internet website
httpwwwsecgovrulessroshtml
Copies of the submission all subsequent amendments all written statements with
respect to the proposed rule change that are filed with the Commission and all written
communications relating to the proposed rule change between the Commission and any
person other than those that may be withheld from the public in accordance with the
provisions of 5 USC 552 will be available for website viewing and printing in the
Commissionrsquos Public Reference Room 100 F Street NE Washington DC 20549 on
SR-NASDAQ-2015-011 Amendment No 2 Page 64 of 64
official business days between the hours of 1000 am and 300 pm Copies of the filing
also will be available for inspection and copying at the principal office of Nasdaq All
comments received will be posted without change the Commission does not edit
personal identifying information from submissions You should submit only information
that you wish to make available publicly
All submissions should refer to File Number SR-NASDAQ-2015-011 and should
be submitted on or before [insert date 21 days from publication in the Federal Register]
For the Commission by the Division of Trading and Markets pursuant to
delegated authority41
Kevin M OrsquoNeill Deputy Secretary
17 CFR 20030-3(a)(12) 41
SR-NASDAQ-2015-011 Amendment No 2 Page 32 of 64
10 Advance Notices Filed Pursuant to Section 806(e) of the Payment Clearing and Settlement Supervision Act
Not applicable
11 Exhibits
1 Completed notice of proposed rule change for publication in the Federal
Register
SR-NASDAQ-2015-011 Amendment No 2 Page 33 of 64
EXHIBIT 1
SECURITIES AND EXCHANGE COMMISSION (Release No 34shy File No SR-NASDAQ-2015-011)
April __ 2015
Self-Regulatory Organizations The NASDAQ Stock Market LLC Notice of Filing of Proposed Rule Change Relating to the Listing and Trading of the Shares of the First Trust Strategic Floating Rate ETF of First Trust Exchange-Traded Fund IV
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (ldquoActrdquo)1 and
Rule 19b-4 thereunder2 notice is hereby given that on February 12 2015 The NASDAQ
Stock Market LLC (ldquoNasdaqrdquo or the ldquoExchangerdquo) filed with the Securities and Exchange
Commission (ldquoCommissionrdquo) the proposed rule change as described in in Items I II and
III below which Items have been prepared by Nasdaq On April 6 2015 Nasdaq filed
Amendment No 1 which replaced the text of the original filing in its entirety On April
15 2015 Nasdaq filed Amendment No 2 which replaced the text of the original filing in
its entirety The Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons
I Self-Regulatory Organizationrsquos Statement of the Terms of Substance of the Proposed Rule Change
Nasdaq proposes to list and trade the shares of the First Trust Strategic Floating
Rate ETF (the ldquoFundrdquo) of the First Trust Strategic Floating Rate ETF (the ldquoFundrdquo) of
First Trust Exchange-Traded Fund IV (the ldquoTrustrdquo) under Nasdaq Rule 5735 (ldquoManaged
1 15 USC 78s(b)(1)
2 17 CFR 24019b-4
SR-NASDAQ-2015-011 Amendment No 2 Page 34 of 64
Fund Sharesrdquo)3 The shares of the Fund are collectively referred to herein as the
ldquoSharesrdquo
The text of the proposed rule change is available at
httpnasdaqcchwallstreetcom at Nasdaqrsquos principal office and at the Commissionrsquos
Public Reference Room
II Self-Regulatory Organizationrsquos Statement of the Purpose of and Statutory Basis for the Proposed Rule Change
In its filing with the Commission Nasdaq included statements concerning the
purpose of and basis for the proposed rule change The text of these statements may be
examined at the places specified in Item IV below Nasdaq has prepared summaries set
forth in Sections A B and C below of the most significant aspects of such statements
A Self-Regulatory Organizationrsquos Statement of the Purpose of and Statutory Basis for the Proposed Rule Change
1 Purpose
The Exchange proposes to list and trade the Shares of the Fund under Nasdaq
Rule 5735 which governs the listing and trading of Managed Fund Shares4 on the
3 The Commission approved Nasdaq Rule 5735 in Securities Exchange Act Release No 57962 (June 13 2008) 73 FR 35175 (June 20 2008) (SR-NASDAQ-2008shy039) There are already multiple actively-managed funds listed on the Exchange see eg Securities Exchange Act Release Nos 69464 (April 26 2013) 78 FR 25774 (May 2 2013) (SR-NASDAQ-2013-036) (order approving listing and trading of First Trust Senior Loan Fund) 68972 (February 22 2013) 78 FR 13721 (February 28 2013) (SR-NASDAQ-2012-147) (order approving listing and trading of First Trust High Yield LongShort ETF) 66489 (February 29 2012) 77 FR 13379 (March 6 2012) (SR-NASDAQ-2012-004) (order approving listing and trading of WisdomTree Emerging Markets Corporate Bond Fund) The Exchange believes the proposed rule change raises no significant issues not previously addressed in those prior Commission orders
4 A Managed Fund Share is a security that represents an interest in an investment company registered under the Investment Company Act of 1940 (15 USC 80ashy
SR-NASDAQ-2015-011 Amendment No 2 Page 35 of 64
Exchange The Fund will be an actively-managed exchange-traded fund (ldquoETFrdquo) The
Shares will be offered by the Trust which was established as a Massachusetts business
trust on September 15 20105 The Trust is registered with the Commission as an
investment company and has filed a registration statement on Form N-1A (ldquoRegistration
Statementrdquo) with the Commission6 The Fund will be a series of the Trust The Fund
intends to qualify each year as a regulated investment company (ldquoRICrdquo) under
Subchapter M of the Internal Revenue Code of 1986 as amended
First Trust Advisors LP will be the investment adviser (ldquoAdviserrdquo) to the Fund
First Trust Portfolios LP (the ldquoDistributorrdquo) will be the principal underwriter and
distributor of the Fundrsquos Shares The Bank of New York Mellon Corporation (ldquoBNYrdquo)
will act as the administrator accounting agent custodian and transfer agent to the Fund
1) (the ldquo1940 Actrdquo) organized as an open-end investment company or similar entity that invests in a portfolio of securities selected by its investment adviser consistent with its investment objectives and policies In contrast an open-end investment company that issues Index Fund Shares listed and traded on the Exchange under Nasdaq Rule 5705 seeks to provide investment results that correspond generally to the price and yield performance of a specific foreign or domestic stock index fixed income securities index or combination thereof
5 The Commission has issued an order upon which the Trust may rely granting certain exemptive relief under the 1940 Act See Investment Company Act Release No 30029 (April 10 2012) (File No 812-13795) (the ldquoExemptive Reliefrdquo) In addition the Commission has issued no-action relief upon which the Trust may rely pertaining to the Fundrsquos ability to invest in derivatives notwithstanding certain representations in the application for the Exemptive Relief See Commission No-Action Letter (December 6 2012)
6 See Post-Effective Amendment No 104 to Registration Statement on Form N-1A for the Trust dated January 29 2015 (File Nos 333-174332 and 811-22559) The descriptions of the Fund and the Shares contained herein are based in part on information in the Registration Statement
7
SR-NASDAQ-2015-011 Amendment No 2 Page 36 of 64
Paragraph (g) of Rule 5735 provides that if the investment adviser to the
investment company issuing Managed Fund Shares is affiliated with a broker-dealer
such investment adviser shall erect a ldquofire wallrdquo between the investment adviser and the
broker-dealer with respect to access to information concerning the composition andor
changes to such investment company portfolio7 In addition paragraph (g) further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio Rule 5735(g) is similar
to Nasdaq Rule 5705(b)(5)(A)(i) however paragraph (g) in connection with the
establishment of a ldquofire wallrdquo between the investment adviser and the broker-dealer
reflects the applicable open-end fundrsquos portfolio not an underlying benchmark index as
is the case with index-based funds The Adviser is not a broker-dealer although it is
affiliated with the Distributor a broker-dealer The Adviser has implemented a fire wall
An investment adviser to an open-end fund is required to be registered under the Investment Advisers Act of 1940 (the ldquoAdvisers Actrdquo) As a result the Adviser and its related personnel are subject to the provisions of Rule 204A-1 under the Advisers Act relating to codes of ethics This Rule requires investment advisers to adopt a code of ethics that reflects the fiduciary nature of the relationship to clients as well as compliance with other applicable securities laws Accordingly procedures designed to prevent the communication and misuse of non-public information by an investment adviser must be consistent with Rule 204A-1 under the Advisers Act In addition Rule 206(4)-7 under the Advisers Act makes it unlawful for an investment adviser to provide investment advice to clients unless such investment adviser has (i) adopted and implemented written policies and procedures reasonably designed to prevent violation by the investment adviser and its supervised persons of the Advisers Act and the Commission rules adopted thereunder (ii) implemented at a minimum an annual review regarding the adequacy of the policies and procedures established pursuant to subparagraph (i) above and the effectiveness of their implementation and (iii) designated an individual (who is a supervised person) responsible for administering the policies and procedures adopted under subparagraph (i) above
8
SR-NASDAQ-2015-011 Amendment No 2 Page 37 of 64
with respect to its broker-dealer affiliate regarding access to information concerning the
composition andor changes to the portfolio In addition personnel who make decisions
on the Fundrsquos portfolio composition will be subject to procedures designed to prevent the
use and dissemination of material non-public information regarding the Fundrsquos portfolio
In the event (a) the Adviser becomes or becomes newly affiliated with a broker-dealer
or (b) any new adviser or sub-adviser is a registered broker-dealer or becomes affiliated
with another broker-dealer it will implement a fire wall with respect to its relevant
personnel andor such broker-dealer affiliate as applicable regarding access to
information concerning the composition andor changes to the portfolio and will be
subject to procedures designed to prevent the use and dissemination of material
non-public information regarding such portfolio The Fund does not currently intend to
use a sub-adviser
First Trust Strategic Floating Rate ETF
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions8 at least 80 of its
The term ldquounder normal market conditionsrdquo as used herein includes but is not limited to the absence of adverse market economic political or other conditions including extreme volatility or trading halts in the fixed income markets or the financial markets generally operational issues causing dissemination of inaccurate market information or force majeure type events such as systems failure natural or man-made disaster act of God armed conflict act of terrorism riot or labor disruption or any similar intervening circumstance For temporary defensive purposes during the initial invest-up period and during periods of high cash inflows or outflows the Fund may depart from its principal investment strategies for example it may hold a higher than normal proportion of its assets in cash During such periods the Fund may not be able to achieve its investment objective The Fund may adopt a defensive strategy when the Adviser believes securities in which the Fund normally invests have elevated risks due to political or economic factors and in other extraordinary circumstances
SR-NASDAQ-2015-011 Amendment No 2 Page 38 of 64
net assets in a portfolio of the following types of floating-rate9 debt instruments issued by
US and non-US public- and private-sector entities floating-rate corporate10 and
government bonds and notes floating-rate agency securities 11 floating-rate instruments
of non-US issuers floating-rate privately-issued securities 12 floating-rate asset-backed
securities 13 floating-rate mortgage-backed securities14 floating-rate loans 15 and
9 For the avoidance of doubt the term ldquofloating-raterdquo shall also include similar terms such as ldquovariable-raterdquo and ldquoadjustable-raterdquo
10 The Adviser expects that under normal market conditions generally for a corporate bond to be considered as an eligible investment after taking into account such an investment at least 75 of the Fundrsquos net assets that are invested in floating-rate corporate bonds and as described below fixed-rate corporate bonds (in the aggregate) will be comprised of corporate bonds that have at the time of original issuance $100 million or more par amount outstanding
11 ldquoAgency securitiesrdquo for these purposes generally includes securities issued by the following entities Government National Mortgage Association (Ginnie Mae) Federal National Mortgage Association (Fannie Mae) Federal Home Loan Banks (FHLBanks) Federal Home Loan Mortgage Corporation (Freddie Mac) Farm Credit System (FCS) Farm Credit Banks (FCBanks) Student Loan Marketing Association (Sallie Mae) Resolution Funding Corporation (REFCORP) Financing Corporation (FICO) and the Farm Credit System (FCS) Financial Assistance Corporation (FAC) Agency securities can include but are not limited to mortgage-backed securities
12 ldquoPrivately-issued securitiesrdquo for these purposes generally includes Rule 144A securities other than mortgage-backed Rule 144A securities Under normal market conditions privately-issued securities will have at the time of original issuance $100 million or more principal amount outstanding to be considered eligible investments
13 Asset-backed securities are securities that are backed by a pool of assets The Fund currently intends to invest in asset-backed securities that are consumer asset-backed securities
14 Mortgage-backed securities which are securities that directly or indirectly represent a participation in or are secured by and payable from mortgage loans on real property will consist of (1) residential mortgage-backed securities (ldquoRMBSrdquo) (2) commercial mortgage-backed securities (ldquoCMBSrdquo) (3) stripped mortgage-backed securities (ldquoSMBSrdquo) which are mortgage-backed securities
SR-NASDAQ-2015-011 Amendment No 2 Page 39 of 64
investment companies16 (including investment companies advised by the Adviser) that
invest primarily in the foregoing types of debt instruments17 (collectively ldquoFloating Rate
Debt Instrumentsrdquo)
where mortgage payments are divided between paying the loanrsquos principal and paying the loanrsquos interest (4) collateralized mortgage obligations (ldquoCMOsrdquo) and real estate mortgage investment conduits (ldquoREMICsrdquo) which are mortgage-backed securities that are divided into multiple classes with each class being entitled to a different share of the principal and interest payments received from the pool of underlying assets
15 The floating-rate loans in which the Fund will invest will represent amounts borrowed by companies or other entities from banks and other lenders and a significant portion of such floating-rate loans may be rated below investment grade or unrated Floating-rate loans held by the Fund may be senior or subordinate obligations of the borrower and may or may not be secured by collateral First lien senior secured floating-rate loans are referred to herein as ldquosenior loansrdquo Floating-rate loans that are not senior loans (ie unsecured floating-rate loans and secured floating-rate loans that are not first lien floating-rate loans) are referred to herein as ldquojunior loansrdquo The Fund will generally invest in floating-rate loans that the Adviser deems to be liquid with readily available prices notwithstanding the foregoing the Fund may invest in floating-rate loans that are deemed illiquid so long as the Fund complies with the 15 limitation on investments of its net assets in illiquid assets described below under ldquoInvestment Restrictionsrdquo
16 The Fund currently anticipates investing only in registered open-end investment companies that are listed and traded in the US on registered exchanges (ie other ETFs) An ETF is an investment company registered under the 1940 Act that holds a portfolio of securities Many ETFs are designed to track the performance of a securities index including industry sector country and region indexes The Fund may invest in the securities of ETFs in excess of the limits imposed under the 1940 Act pursuant to exemptive orders obtained by other ETFs and their sponsors from the Commission In addition the Fund may invest in the securities of certain investment companies in excess of the limits imposed under the 1940 Act pursuant to an exemptive order obtained by the Trust and the Adviser from the Commission See Investment Company Act Release No 30377 (February 5 2013) (File No 812-13895) The ETFs in which the Fund may invest include Index Fund Shares (as described in Nasdaq Rule 5705) Portfolio Depository Receipts (as described in Nasdaq Rule 5705) and Managed Fund Shares (as described in Nasdaq Rule 5735) While the Fund may invest in inverse ETFs the Fund will not invest in leveraged or inverse leveraged (eg 2X or -3X) ETFs
SR-NASDAQ-2015-011 Amendment No 2 Page 40 of 64
At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade To be considered
ldquoinvestment graderdquo under normal market conditions rated Floating Rate Debt
Instruments will carry at the time of purchase a rating in the highest four rating
categories of at least one nationally recognized statistical ratings organization
(ldquoNRSROrdquo) (eg BBB- or higher by Standard amp Poorrsquos Ratings Services (ldquoSampPrdquo)
andor Fitch Ratings (ldquoFitchrdquo) or Baa3 or higher by Moodyrsquos Investors Service Inc
(ldquoMoodyrsquosrdquo)18 For unrated securities to be considered ldquoinvestment graderdquo under normal
market conditions such securities will be determined at the time of purchase to be of
comparable quality19 by the Adviser The Fund may invest up to 35 of its net assets in
securities that are at the time of investment rated below investment grade by each
NRSRO rating such securities (or securities that are unrated and determined by the
17 The liquidity of a security especially in the case of asset-backed and mortgage-backed securities will be a substantial factor in the Fundrsquos security selection process Consistent with the discussion below under ldquoInvestment Restrictionsrdquo the Fund will not purchase any Floating Rate Debt Instruments (including asset-backed securities and mortgage-backed securities) that in the Adviserrsquos opinion are illiquid if as a result more than 15 of the value of the Fundrsquos net assets will be invested in illiquid assets
18 For the avoidance of doubt if a security is rated by multiple NRSROs and receives different ratings the Fund will treat the security as being rated in the highest rating category received from an NRSRO
19 Comparable quality of unrated securities will be determined by the Adviser based on fundamental credit analysis of the unrated security and comparable NRSRO-rated securities On a best efforts basis the Adviser will attempt to make a rating determination based on publicly available data In making a ldquocomparable qualityrdquo determination the Adviser may consider for example whether the issuer of the security has issued other rated securities the nature and provisions of the relevant security whether the obligations under the relevant security are guaranteed by another entity and the rating of such guarantor (if any) relevant cash flows macroeconomic analysis andor sector or industry analysis
SR-NASDAQ-2015-011 Amendment No 2 Page 41 of 64
Adviser to be of comparable quality) commonly referred to as ldquohigh yieldrdquo or ldquojunkrdquo
bonds If subsequent to purchase by the Fund a security held by the Fund experiences a
decline in credit quality and falls below investment grade the Fund may continue to hold
the security and it will not cause the Fund to violate the 35 investment limitation
however the security will be taken into account for purposes of determining whether
purchases of additional securities will cause the Fund to violate such limitation
The Fund will limit its investments in asset-backed securities (excluding agency
mortgage-backed securities) and non-agency mortgage-backed securities (in the
aggregate) to 20 of its net assets20 In addition the Fund will limit its investments in
junior loans to 20 of its net assets
The Fund will hold debt securities (including in the aggregate Floating Rate
Debt Instruments and the fixed-rate debt securities described below) of at least 13
non-affiliated issuers
Other Investments
Under normal market conditions the Fund will invest primarily in the Floating
Rate Debt Instruments described above to meet its investment objective In addition the
Fund may invest up to 20 of its net assets in the following types of fixed-rate debt
securities corporate21 and government bonds and notes agency securities22 instruments
20 For the avoidance of doubt there is no limitation on the Fundrsquos investments in agency mortgage-backed securities
21 See footnote 10 above
22 See footnote 11 above
SR-NASDAQ-2015-011 Amendment No 2 Page 42 of 64
of non-US issuers in developed markets privately-issued securities 23 asset-backed
securities 24 mortgage-backed securities 25 municipal bonds money market securities26
and investment companies27 (including investment companies advised by the Adviser)
that invest primarily in the foregoing types of debt securities
Further to pursue its investment objective the Fund may invest up to 20 of the
value of its net assets in exchange-listed options on US Treasury futures contracts and
exchange-listed US Treasury futures contracts28 The use of these derivative
transactions may allow the Fund to obtain net long or short exposures to selected interest
rates These derivatives may also be used to hedge risks including interest rate risks and
credit risks associated with the Fundrsquos portfolio investments The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
23 See footnote 12 above
24 See footnote 13 above
25 See footnote 14 above
26 ldquoMoney market securitiesrdquo for these purposes generally includes short-term high-quality obligations issued or guaranteed by the US Treasury or the agencies or instrumentalities of the US government short-term high-quality securities issued or guaranteed by non-US governments agencies and instrumentalities repurchase agreements commercial paper (both asset-backed and non-assetshybacked) and deposits and other obligations of US and non-US banks and financial institutions
27 See footnote 16 above
28 At least 90 of the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be invested in instruments that trade in markets that are members of the Intermarket Surveillance Group (ldquoISGrdquo) (see footnote 40 below) or are parties to a comprehensive surveillance sharing agreement with the Exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 43 of 64
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index
Investment Restrictions
The Fund will not invest 25 or more of the value of its total assets in securities
of issuers in any one industry This restriction does not apply to (a) obligations issued or
guaranteed by the US government its agencies or instrumentalities or (b) securities of
other investment companies29
The Fund may hold up to an aggregate amount of 15 of its net assets in illiquid
assets (calculated at the time of investment) including Rule 144A securities deemed
illiquid by the Adviser30 The Fund will monitor its portfolio liquidity on an ongoing
basis to determine whether in light of current circumstances an adequate level of
liquidity is being maintained and will consider taking appropriate steps in order to
maintain adequate liquidity if through a change in values net assets or other
circumstances more than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid
assets include securities subject to contractual or other restrictions on resale and other
29 See Form N-1A Item 9 The Commission has taken the position that a fund is concentrated if it invests more than 25 of the value of its total assets in any one industry See eg Investment Company Act Release No 9011 (October 30 1975) 40 FR 54241 (November 21 1975)
30 In reaching liquidity decisions the Adviser may consider the following factors the frequency of trades and quotes for the security the number of dealers wishing to purchase or sell the security and the number of other potential purchasers dealer undertakings to make a market in the security and the nature of the security and the nature of the marketplace in which it trades (eg the time needed to dispose of the security the method of soliciting offers and the mechanics of transfer)
SR-NASDAQ-2015-011 Amendment No 2 Page 44 of 64
instruments that lack readily available markets as determined in accordance with
Commission staff guidance31
The Fund will not invest in non-US equity securities
Creation and Redemption of Shares
The Fund will issue and redeem Shares on a continuous basis at net asset value
(ldquoNAVrdquo)32 only in large blocks of Shares (ldquoCreation Unitsrdquo) in transactions with
authorized participants generally including broker-dealers and large institutional
investors (ldquoAuthorized Participantsrdquo) Creation Units generally will consist of 50000
Shares although this may change from time to time Creation Units however are not
expected to consist of less than 50000 Shares As described in the Registration
Statement and consistent with the Exemptive Relief the Fund will issue and redeem
Creation Units in exchange for an in-kind portfolio of instruments andor cash in lieu of
31 The Commission has stated that long-standing Commission guidelines have required open-end funds to hold no more than 15 of their net assets in illiquid securities and other illiquid assets See Investment Company Act Release No 28193 (March 11 2008) 73 FR 14618 (March 18 2008) footnote 34 See also Investment Company Act Release No 5847 (October 21 1969) 35 FR 19989 (December 31 1970) (Statement Regarding ldquoRestricted Securitiesrdquo) Investment Company Act Release No 18612 (March 12 1992) 57 FR 9828 (March 20 1992) (Revisions of Guidelines to Form N-1A) A fundrsquos portfolio security is illiquid if it cannot be disposed of in the ordinary course of business within seven days at approximately the value ascribed to it by the fund See Investment Company Act Release No 14983 (March 12 1986) 51 FR 9773 (March 21 1986) (adopting amendments to Rule 2a-7 under the 1940 Act) Investment Company Act Release No 17452 (April 23 1990) 55 FR 17933 (April 30 1990) (adopting Rule 144A under the Securities Act of 1933)
32 The NAV of the Fundrsquos Shares generally will be calculated once daily Monday through Friday as of the close of regular trading on the New York Stock Exchange generally 400 pm Eastern Time (the ldquoNAV Calculation Timerdquo) NAV per Share will be calculated by dividing the Fundrsquos net assets by the number of Fund Shares outstanding For more information regarding the valuation of Fund investments in calculating the Fundrsquos NAV see the Registration Statement
SR-NASDAQ-2015-011 Amendment No 2 Page 45 of 64
such instruments (the ldquoCreation Basketrdquo) In addition if there is a difference between the
NAV attributable to a Creation Unit and the market value of the Creation Basket
exchanged for the Creation Unit the party conveying instruments with the lower value
will pay to the other an amount in cash equal to the difference (referred to as the ldquoCash
Componentrdquo)
Creations and redemptions must be made by or through an Authorized Participant
that has executed an agreement that has been agreed to by the Distributor and BNY with
respect to creations and redemptions of Creation Units All standard orders to create
Creation Units must be received by the transfer agent no later than the closing time of the
regular trading session on the New York Stock Exchange (ordinarily 400 pm Eastern
Time) (the ldquoClosing Timerdquo) in each case on the date such order is placed in order for the
creation of Creation Units to be effected based on the NAV of Shares as next determined
on such date after receipt of the order in proper form Shares may be redeemed only in
Creation Units at their NAV next determined after receipt not later than the Closing Time
of a redemption request in proper form by the Fund through the transfer agent and only
on a business day
The Fundrsquos custodian through the National Securities Clearing Corporation will
make available on each business day prior to the opening of business of the Exchange
the list of the names and quantities of the instruments comprising the Creation Basket as
well as the estimated Cash Component (if any) for that day The published Creation
Basket will apply until a new Creation Basket is announced on the following business
day prior to commencement of trading in the Shares
SR-NASDAQ-2015-011 Amendment No 2 Page 46 of 64
Net Asset Value
The Fundrsquos NAV will be determined as of the close of trading (normally
400 pm Eastern Time) on each day the New York Stock Exchange is open for
business NAV will be calculated for the Fund by taking the market price of the Fundrsquos
total assets including interest or dividends accrued but not yet collected less all
liabilities and dividing such amount by the total number of Shares outstanding The
result rounded to the nearest cent will be the NAV per Share All valuations will be
subject to review by the Board of Trustees of the Trust (ldquoTrust Boardrdquo) or its delegate
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with valuation procedures (which may be revised from time to time) adopted by the Trust
Board (the ldquoValuation Proceduresrdquo) and in accordance with the 1940 Act A market
valuation generally means a valuation (i) obtained from an exchange an independent
pricing service (ldquoPricing Servicerdquo) or a major market maker (or dealer) or (ii) based on a
price quotation or other equivalent indication of value supplied by an exchange a Pricing
Service or a major market maker (or dealer) The information summarized below is
based on the Valuation Procedures as currently in effect however as noted above the
Valuation Procedures are amended from time to time and therefore such information is
subject to change
Certain securities including Floating Rate Debt Instruments in which the Fund
may invest will not be listed on any securities exchange or board of trade Such
securities will typically be bought and sold by institutional investors in individually
negotiated private transactions that function in many respects like an over-the-counter
SR-NASDAQ-2015-011 Amendment No 2 Page 47 of 64
secondary market although typically no formal market makers will exist Certain
securities particularly debt securities will have few or no trades or trade infrequently
and information regarding a specific security may not be widely available or may be
incomplete Accordingly determinations of the fair value of debt securities may be
based on infrequent and dated information Because there is less reliable objective data
available elements of judgment may play a greater role in valuation of debt securities
than for other types of securities Typically Floating Rate Debt Instruments and other
debt securities in which the Fund may invest (other than those described below) will be
valued using information provided by a Pricing Service Debt securities having a
remaining maturity of 60 days or less when purchased will be valued at cost adjusted for
amortization of premiums and accretion of discounts provided the Adviserrsquos pricing
committee (the ldquoPricing Committeerdquo) has determined that the use of amortized cost is an
appropriate reflection of fair value given market and issuer-specific conditions existing at
the time of the determination Overnight repurchase agreements will be valued at cost
and term repurchase agreements (ie those whose maturity exceeds seven days) will be
valued at the average of the bid quotations obtained daily from at least two recognized
dealers
Asset-backed and mortgage-backed securities will generally be valued by using a
Pricing Service If a Pricing Service does not cover a particular asset-backed or
mortgage-backed security or discontinues covering a particular asset-backed or
mortgage-backed security the security will be priced using broker quotes generally
provided by brokers that make or participate in markets in the security To derive values
Pricing Services and broker-dealers may use matrix pricing and valuation models as well
SR-NASDAQ-2015-011 Amendment No 2 Page 48 of 64
as recent market transactions for the same or similar assets As it deems appropriate the
Pricing Committee may determine that a Pricing Service price does not represent an
accurate value of an asset-backed or mortgage-backed security based on broker quotes it
receives a recent trade in the security by the Fund information from a portfolio manager
or other market information In the event that the Pricing Committee determines that the
Pricing Service price is unreliable or inaccurate based on such other information broker
quotes may be used Additionally if the Pricing Committee determines that the price of
an asset-backed or mortgage-backed security obtained from a Pricing Service and
available broker quotes is unreliable or inaccurate due to market conditions or other
reasons or if a Pricing Service price or broker quote is unavailable the security will be
valued using fair value pricing as described below
Equity securities listed on any exchange other than the Exchange will be valued at
the last sale price on the exchange on which they are principally traded on the business
day as of which such value is being determined Equity securities listed on the Exchange
will be valued at the official closing price on the business day as of which such value is
being determined If there has been no sale on such day or no official closing price in
the case of securities traded on the Exchange the securities will be valued using fair
value pricing as described below Equity securities traded on more than one securities
exchange will be valued at the last sale price or official closing price as applicable on
the business day as of which such value is being determined at the close of the exchange
representing the principal market for such securities
Exchange-traded options and futures contracts will be valued at the closing price
in the market where such contracts are principally traded
SR-NASDAQ-2015-011 Amendment No 2 Page 49 of 64
Certain securities including Floating Rate Debt Instruments in which the Fund
will invest will not be able to be priced by pre-established pricing methods Such
securities may be valued by the Trust Board or its delegate at fair value The use of fair
value pricing by the Fund will be governed by the Valuation Procedures and conducted in
accordance with the provisions of the 1940 Act Valuing the Fundrsquos securities using fair
value pricing will result in using prices for those securities that may differ from current
market valuations or official closing prices on the applicable exchange
Availability of Information
The Fundrsquos website (wwwftportfolioscom) which will be publicly available
prior to the public offering of Shares will include a form of the prospectus for the Fund
that may be downloaded The website will include the Sharesrsquo ticker CUSIP and
exchange information along with additional quantitative information updated on a daily
basis including for the Fund (1) daily trading volume the prior business dayrsquos reported
NAV and closing price mid-point of the bidask spread at the time of calculation of such
NAV (the ldquoBidAsk Pricerdquo)33 and a calculation of the premium and discount of the
BidAsk Price against the NAV and (2) data in chart format displaying the frequency
distribution of discounts and premiums of the daily BidAsk Price against the NAV
within appropriate ranges for each of the four previous calendar quarters On each
business day before commencement of trading in Shares in the Regular Market Session34
33 The BidAsk Price of the Fund will be determined using the mid-point of the highest bid and the lowest offer on the Exchange as of the time of calculation of the Fundrsquos NAV The records relating to BidAsk Prices will be retained by the Fund and its service providers
34 See Nasdaq Rule 4120(b)(4) (describing the three trading sessions on the Exchange (1) Pre-Market Session from 4 am to 930 am Eastern Time (2)
SR-NASDAQ-2015-011 Amendment No 2 Page 50 of 64
on the Exchange the Fund will disclose on its website the identities and quantities of the
portfolio of securities and other assets (the ldquoDisclosed Portfoliordquo as defined in Nasdaq
Rule 5735(c)(2)) held by the Fund that will form the basis for the Fundrsquos calculation of
NAV at the end of the business day 35 The Fundrsquos disclosure of derivative positions in
the Disclosed Portfolio will include information that market participants can use to value
these positions intraday On a daily basis the Fund will disclose on the Fundrsquos website
the following information regarding each portfolio holding as applicable to the type of
holding ticker symbol CUSIP number or other identifier if any a description of the
holding (including the type of holding) the identity of the security or other asset or
instrument underlying the holding if any for options the option strike price quantity
held (as measured by for example par value notional value or number of shares
contracts or units) maturity date if any coupon rate if any effective date if any market
value of the holding and percentage weighting of the holding in the Fundrsquos portfolio
The website information will be publicly available at no charge
In addition for the Fund an estimated value defined in Rule 5735(c)(3) as the
ldquoIntraday Indicative Valuerdquo that reflects an estimated intraday value of the Fundrsquos
Disclosed Portfolio will be disseminated Moreover the Intraday Indicative Value
Regular Market Session from 930 am to 4 pm or 415 pm Eastern Time and (3) Post-Market Session from 4 pm or 415 pm to 8 pm Eastern Time)
Under accounting procedures to be followed by the Fund trades made on the prior business day (ldquoTrdquo) will be booked and reflected in NAV on the current business day (ldquoT+1rdquo) Accordingly the Fund will be able to disclose at the beginning of the business day the portfolio that will form the basis for the NAV calculation at the end of the business day
35
SR-NASDAQ-2015-011 Amendment No 2 Page 51 of 64
available on the NASDAQ OMX Information LLC proprietary index data service36 will
be based upon the current value for the components of the Disclosed Portfolio and will be
updated and widely disseminated by one or more major market data vendors and broadly
displayed at least every 15 seconds during the Regular Market Session The Intraday
Indicative Value will be based on quotes and closing prices from the securitiesrsquo local
market and may not reflect events that occur subsequent to the local marketrsquos close
Premiums and discounts between the Intraday Indicative Value and the market price may
occur This should not be viewed as a ldquoreal timerdquo update of the NAV per Share of the
Fund which is calculated only once a day
The dissemination of the Intraday Indicative Value together with the Disclosed
Portfolio will allow investors to determine the value of the underlying portfolio of the
Fund on a daily basis and will provide a close estimate of that value throughout the
trading day
Investors will also be able to obtain the Fundrsquos Statement of Additional
Information (ldquoSAIrdquo) the Fundrsquos annual and semi-annual reports (together ldquoShareholder
Reportsrdquo) and its Form N-CSR and Form N-SAR filed twice a year The Fundrsquos SAI
and Shareholder Reports will be available free upon request from the Fund and those
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or
downloaded from the Commissionrsquos website at wwwsecgov Information regarding
Currently the NASDAQ OMX Global Index Data Service (ldquoGIDSrdquo) is the NASDAQ OMX global index data feed service offering real-time updates daily summary messages and access to widely followed indexes and Intraday Indicative Values for ETFs GIDS provides investment professionals with the daily information needed to track or trade NASDAQ OMX indexes listed ETFs or third-party partner indexes and ETFs
36
SR-NASDAQ-2015-011 Amendment No 2 Page 52 of 64
market price and trading volume of the Shares will be continually available on a real-time
basis throughout the day on brokersrsquo computer screens and other electronic services
Information regarding the previous dayrsquos closing price and trading volume information
for the Shares will be published daily in the financial section of newspapers Quotation
and last sale information for the Shares will be available via Nasdaq proprietary quote
and trade services as well as in accordance with the Unlisted Trading Privileges and the
Consolidated Tape Association (ldquoCTArdquo) plans for the Shares Quotation and last sale
information for the other ETFs in which the Fund will invest will be available via the
quote and trade services of their respective primary exchanges as well as in accordance
with the Unlisted Trading Privileges and the CTA plans as applicable Quotation and
last sale information for US exchange-traded options will be available via the Options
Price Reporting Authority Intraday executable price quotations on Floating Rate Debt
Instruments and other assets not traded on an exchange will be available from major
broker-dealer firms or market data vendors as well as from automated quotation systems
published or other public sources or online information services Additionally the Trade
Reporting and Compliance Engine (ldquoTRACErdquo) of the Financial Industry Regulatory
Authority (ldquoFINRArdquo) will be a source of price information for corporate bonds
privately-issued securities mortgage-backed securities and asset-backed securities to the
extent transactions in such securities are reported to TRACE37 For exchange-traded
Broker-dealers that are FINRA member firms have an obligation to report transactions in specified debt securities to TRACE to the extent required under applicable FINRA rules Generally such debt securities will have at issuance a maturity that exceeds one calendar year
37
SR-NASDAQ-2015-011 Amendment No 2 Page 53 of 64
assets intraday pricing information will be available directly from the applicable listing
exchange
Additional information regarding the Fund and the Shares including investment
strategies risks creation and redemption procedures fees Fund holdings disclosure
policies distributions and taxes will be included in the Registration Statement
Initial and Continued Listing
The Shares will be subject to Rule 5735 which sets forth the initial and continued
listing criteria applicable to Managed Fund Shares The Exchange represents that for
initial andor continued listing the Fund must be in compliance with Rule 10A-338 under
the Act A minimum of 100000 Shares will be outstanding at the commencement of
trading on the Exchange The Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the NAV and the
Disclosed Portfolio will be made available to all market participants at the same time
Trading Halts
With respect to trading halts the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading in the Shares of the Fund Nasdaq will
halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12) Trading may be
halted because of market conditions or for reasons that in the view of the Exchange
make trading in the Shares inadvisable These may include (1) the extent to which
trading is not occurring in the securities andor the other assets constituting the Disclosed
Portfolio of the Fund or (2) whether other unusual conditions or circumstances
See 17 CFR 24010A-3 38
SR-NASDAQ-2015-011 Amendment No 2 Page 54 of 64
detrimental to the maintenance of a fair and orderly market are present Trading in the
Shares also will be subject to Rule 5735(d)(2)(D) which sets forth circumstances under
which Shares of the Fund may be halted
Trading Rules
Nasdaq deems the Shares to be equity securities thus rendering trading in the
Shares subject to Nasdaqrsquos existing rules governing the trading of equity securities
Nasdaq will allow trading in the Shares from 400 am until 800 pm Eastern Time
The Exchange has appropriate rules to facilitate transactions in the Shares during all
trading sessions As provided in Nasdaq Rule 5735(b)(3) the minimum price variation
for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $001
Surveillance
The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws39 The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities laws
The surveillances referred to above generally focus on detecting securities trading
outside their normal patterns which could be indicative of manipulative or other violative
activity When such situations are detected surveillance analysis follows and
FINRA surveils trading on the Exchange pursuant to a regulatory services agreement The Exchange is responsible for FINRArsquos performance under this regulatory services agreement
39
SR-NASDAQ-2015-011 Amendment No 2 Page 55 of 64
investigations are opened where appropriate to review the behavior of all relevant
parties for all relevant trading violations
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 56 of 64
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
SR-NASDAQ-2015-011 Amendment No 2 Page 57 of 64
2 Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
SR-NASDAQ-2015-011 Amendment No 2 Page 58 of 64
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
SR-NASDAQ-2015-011 Amendment No 2 Page 59 of 64
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
SR-NASDAQ-2015-011 Amendment No 2 Page 60 of 64
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 61 of 64
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
SR-NASDAQ-2015-011 Amendment No 2 Page 62 of 64
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
B Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
C Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received From Members Participants or Others
Written comments were neither solicited nor received
III Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Within 45 days of the date of publication of this notice in the Federal Register or
within such longer period (i) as the Commission may designate up to 90 days of such date
if it finds such longer period to be appropriate and publishes its reasons for so finding or
(ii) as to which the Exchange consents the Commission shall (a) by order approve or
disapprove such proposed rule change or (b) institute proceedings to determine whether
the proposed rule change should be disapproved
SR-NASDAQ-2015-011 Amendment No 2 Page 63 of 64
IV Solicitation of Comments
Interested persons are invited to submit written data views and arguments
concerning the foregoing including whether the proposed rule change is consistent with
the Act Comments may be submitted by any of the following methods
Electronic comments
bull Use the Commissionrsquos Internet comment form
(httpwwwsecgovrulessroshtml) or
bull Send an e-mail to rule-commentssecgov Please include File Number
SR-NASDAQ-2015-011 on the subject line
Paper comments
bull Send paper comments in triplicate to Brent J Fields Secretary Securities and
Exchange Commission Station Place 100 F Street NE Washington DC
20549-9303
All submissions should refer to File Number SR-NASDAQ-2015-011 This file number
should be included on the subject line if e-mail is used To help the Commission process
and review your comments more efficiently please use only one method The
Commission will post all comments on the Commissionrsquos Internet website
httpwwwsecgovrulessroshtml
Copies of the submission all subsequent amendments all written statements with
respect to the proposed rule change that are filed with the Commission and all written
communications relating to the proposed rule change between the Commission and any
person other than those that may be withheld from the public in accordance with the
provisions of 5 USC 552 will be available for website viewing and printing in the
Commissionrsquos Public Reference Room 100 F Street NE Washington DC 20549 on
SR-NASDAQ-2015-011 Amendment No 2 Page 64 of 64
official business days between the hours of 1000 am and 300 pm Copies of the filing
also will be available for inspection and copying at the principal office of Nasdaq All
comments received will be posted without change the Commission does not edit
personal identifying information from submissions You should submit only information
that you wish to make available publicly
All submissions should refer to File Number SR-NASDAQ-2015-011 and should
be submitted on or before [insert date 21 days from publication in the Federal Register]
For the Commission by the Division of Trading and Markets pursuant to
delegated authority41
Kevin M OrsquoNeill Deputy Secretary
17 CFR 20030-3(a)(12) 41
SR-NASDAQ-2015-011 Amendment No 2 Page 33 of 64
EXHIBIT 1
SECURITIES AND EXCHANGE COMMISSION (Release No 34shy File No SR-NASDAQ-2015-011)
April __ 2015
Self-Regulatory Organizations The NASDAQ Stock Market LLC Notice of Filing of Proposed Rule Change Relating to the Listing and Trading of the Shares of the First Trust Strategic Floating Rate ETF of First Trust Exchange-Traded Fund IV
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (ldquoActrdquo)1 and
Rule 19b-4 thereunder2 notice is hereby given that on February 12 2015 The NASDAQ
Stock Market LLC (ldquoNasdaqrdquo or the ldquoExchangerdquo) filed with the Securities and Exchange
Commission (ldquoCommissionrdquo) the proposed rule change as described in in Items I II and
III below which Items have been prepared by Nasdaq On April 6 2015 Nasdaq filed
Amendment No 1 which replaced the text of the original filing in its entirety On April
15 2015 Nasdaq filed Amendment No 2 which replaced the text of the original filing in
its entirety The Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons
I Self-Regulatory Organizationrsquos Statement of the Terms of Substance of the Proposed Rule Change
Nasdaq proposes to list and trade the shares of the First Trust Strategic Floating
Rate ETF (the ldquoFundrdquo) of the First Trust Strategic Floating Rate ETF (the ldquoFundrdquo) of
First Trust Exchange-Traded Fund IV (the ldquoTrustrdquo) under Nasdaq Rule 5735 (ldquoManaged
1 15 USC 78s(b)(1)
2 17 CFR 24019b-4
SR-NASDAQ-2015-011 Amendment No 2 Page 34 of 64
Fund Sharesrdquo)3 The shares of the Fund are collectively referred to herein as the
ldquoSharesrdquo
The text of the proposed rule change is available at
httpnasdaqcchwallstreetcom at Nasdaqrsquos principal office and at the Commissionrsquos
Public Reference Room
II Self-Regulatory Organizationrsquos Statement of the Purpose of and Statutory Basis for the Proposed Rule Change
In its filing with the Commission Nasdaq included statements concerning the
purpose of and basis for the proposed rule change The text of these statements may be
examined at the places specified in Item IV below Nasdaq has prepared summaries set
forth in Sections A B and C below of the most significant aspects of such statements
A Self-Regulatory Organizationrsquos Statement of the Purpose of and Statutory Basis for the Proposed Rule Change
1 Purpose
The Exchange proposes to list and trade the Shares of the Fund under Nasdaq
Rule 5735 which governs the listing and trading of Managed Fund Shares4 on the
3 The Commission approved Nasdaq Rule 5735 in Securities Exchange Act Release No 57962 (June 13 2008) 73 FR 35175 (June 20 2008) (SR-NASDAQ-2008shy039) There are already multiple actively-managed funds listed on the Exchange see eg Securities Exchange Act Release Nos 69464 (April 26 2013) 78 FR 25774 (May 2 2013) (SR-NASDAQ-2013-036) (order approving listing and trading of First Trust Senior Loan Fund) 68972 (February 22 2013) 78 FR 13721 (February 28 2013) (SR-NASDAQ-2012-147) (order approving listing and trading of First Trust High Yield LongShort ETF) 66489 (February 29 2012) 77 FR 13379 (March 6 2012) (SR-NASDAQ-2012-004) (order approving listing and trading of WisdomTree Emerging Markets Corporate Bond Fund) The Exchange believes the proposed rule change raises no significant issues not previously addressed in those prior Commission orders
4 A Managed Fund Share is a security that represents an interest in an investment company registered under the Investment Company Act of 1940 (15 USC 80ashy
SR-NASDAQ-2015-011 Amendment No 2 Page 35 of 64
Exchange The Fund will be an actively-managed exchange-traded fund (ldquoETFrdquo) The
Shares will be offered by the Trust which was established as a Massachusetts business
trust on September 15 20105 The Trust is registered with the Commission as an
investment company and has filed a registration statement on Form N-1A (ldquoRegistration
Statementrdquo) with the Commission6 The Fund will be a series of the Trust The Fund
intends to qualify each year as a regulated investment company (ldquoRICrdquo) under
Subchapter M of the Internal Revenue Code of 1986 as amended
First Trust Advisors LP will be the investment adviser (ldquoAdviserrdquo) to the Fund
First Trust Portfolios LP (the ldquoDistributorrdquo) will be the principal underwriter and
distributor of the Fundrsquos Shares The Bank of New York Mellon Corporation (ldquoBNYrdquo)
will act as the administrator accounting agent custodian and transfer agent to the Fund
1) (the ldquo1940 Actrdquo) organized as an open-end investment company or similar entity that invests in a portfolio of securities selected by its investment adviser consistent with its investment objectives and policies In contrast an open-end investment company that issues Index Fund Shares listed and traded on the Exchange under Nasdaq Rule 5705 seeks to provide investment results that correspond generally to the price and yield performance of a specific foreign or domestic stock index fixed income securities index or combination thereof
5 The Commission has issued an order upon which the Trust may rely granting certain exemptive relief under the 1940 Act See Investment Company Act Release No 30029 (April 10 2012) (File No 812-13795) (the ldquoExemptive Reliefrdquo) In addition the Commission has issued no-action relief upon which the Trust may rely pertaining to the Fundrsquos ability to invest in derivatives notwithstanding certain representations in the application for the Exemptive Relief See Commission No-Action Letter (December 6 2012)
6 See Post-Effective Amendment No 104 to Registration Statement on Form N-1A for the Trust dated January 29 2015 (File Nos 333-174332 and 811-22559) The descriptions of the Fund and the Shares contained herein are based in part on information in the Registration Statement
7
SR-NASDAQ-2015-011 Amendment No 2 Page 36 of 64
Paragraph (g) of Rule 5735 provides that if the investment adviser to the
investment company issuing Managed Fund Shares is affiliated with a broker-dealer
such investment adviser shall erect a ldquofire wallrdquo between the investment adviser and the
broker-dealer with respect to access to information concerning the composition andor
changes to such investment company portfolio7 In addition paragraph (g) further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio Rule 5735(g) is similar
to Nasdaq Rule 5705(b)(5)(A)(i) however paragraph (g) in connection with the
establishment of a ldquofire wallrdquo between the investment adviser and the broker-dealer
reflects the applicable open-end fundrsquos portfolio not an underlying benchmark index as
is the case with index-based funds The Adviser is not a broker-dealer although it is
affiliated with the Distributor a broker-dealer The Adviser has implemented a fire wall
An investment adviser to an open-end fund is required to be registered under the Investment Advisers Act of 1940 (the ldquoAdvisers Actrdquo) As a result the Adviser and its related personnel are subject to the provisions of Rule 204A-1 under the Advisers Act relating to codes of ethics This Rule requires investment advisers to adopt a code of ethics that reflects the fiduciary nature of the relationship to clients as well as compliance with other applicable securities laws Accordingly procedures designed to prevent the communication and misuse of non-public information by an investment adviser must be consistent with Rule 204A-1 under the Advisers Act In addition Rule 206(4)-7 under the Advisers Act makes it unlawful for an investment adviser to provide investment advice to clients unless such investment adviser has (i) adopted and implemented written policies and procedures reasonably designed to prevent violation by the investment adviser and its supervised persons of the Advisers Act and the Commission rules adopted thereunder (ii) implemented at a minimum an annual review regarding the adequacy of the policies and procedures established pursuant to subparagraph (i) above and the effectiveness of their implementation and (iii) designated an individual (who is a supervised person) responsible for administering the policies and procedures adopted under subparagraph (i) above
8
SR-NASDAQ-2015-011 Amendment No 2 Page 37 of 64
with respect to its broker-dealer affiliate regarding access to information concerning the
composition andor changes to the portfolio In addition personnel who make decisions
on the Fundrsquos portfolio composition will be subject to procedures designed to prevent the
use and dissemination of material non-public information regarding the Fundrsquos portfolio
In the event (a) the Adviser becomes or becomes newly affiliated with a broker-dealer
or (b) any new adviser or sub-adviser is a registered broker-dealer or becomes affiliated
with another broker-dealer it will implement a fire wall with respect to its relevant
personnel andor such broker-dealer affiliate as applicable regarding access to
information concerning the composition andor changes to the portfolio and will be
subject to procedures designed to prevent the use and dissemination of material
non-public information regarding such portfolio The Fund does not currently intend to
use a sub-adviser
First Trust Strategic Floating Rate ETF
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions8 at least 80 of its
The term ldquounder normal market conditionsrdquo as used herein includes but is not limited to the absence of adverse market economic political or other conditions including extreme volatility or trading halts in the fixed income markets or the financial markets generally operational issues causing dissemination of inaccurate market information or force majeure type events such as systems failure natural or man-made disaster act of God armed conflict act of terrorism riot or labor disruption or any similar intervening circumstance For temporary defensive purposes during the initial invest-up period and during periods of high cash inflows or outflows the Fund may depart from its principal investment strategies for example it may hold a higher than normal proportion of its assets in cash During such periods the Fund may not be able to achieve its investment objective The Fund may adopt a defensive strategy when the Adviser believes securities in which the Fund normally invests have elevated risks due to political or economic factors and in other extraordinary circumstances
SR-NASDAQ-2015-011 Amendment No 2 Page 38 of 64
net assets in a portfolio of the following types of floating-rate9 debt instruments issued by
US and non-US public- and private-sector entities floating-rate corporate10 and
government bonds and notes floating-rate agency securities 11 floating-rate instruments
of non-US issuers floating-rate privately-issued securities 12 floating-rate asset-backed
securities 13 floating-rate mortgage-backed securities14 floating-rate loans 15 and
9 For the avoidance of doubt the term ldquofloating-raterdquo shall also include similar terms such as ldquovariable-raterdquo and ldquoadjustable-raterdquo
10 The Adviser expects that under normal market conditions generally for a corporate bond to be considered as an eligible investment after taking into account such an investment at least 75 of the Fundrsquos net assets that are invested in floating-rate corporate bonds and as described below fixed-rate corporate bonds (in the aggregate) will be comprised of corporate bonds that have at the time of original issuance $100 million or more par amount outstanding
11 ldquoAgency securitiesrdquo for these purposes generally includes securities issued by the following entities Government National Mortgage Association (Ginnie Mae) Federal National Mortgage Association (Fannie Mae) Federal Home Loan Banks (FHLBanks) Federal Home Loan Mortgage Corporation (Freddie Mac) Farm Credit System (FCS) Farm Credit Banks (FCBanks) Student Loan Marketing Association (Sallie Mae) Resolution Funding Corporation (REFCORP) Financing Corporation (FICO) and the Farm Credit System (FCS) Financial Assistance Corporation (FAC) Agency securities can include but are not limited to mortgage-backed securities
12 ldquoPrivately-issued securitiesrdquo for these purposes generally includes Rule 144A securities other than mortgage-backed Rule 144A securities Under normal market conditions privately-issued securities will have at the time of original issuance $100 million or more principal amount outstanding to be considered eligible investments
13 Asset-backed securities are securities that are backed by a pool of assets The Fund currently intends to invest in asset-backed securities that are consumer asset-backed securities
14 Mortgage-backed securities which are securities that directly or indirectly represent a participation in or are secured by and payable from mortgage loans on real property will consist of (1) residential mortgage-backed securities (ldquoRMBSrdquo) (2) commercial mortgage-backed securities (ldquoCMBSrdquo) (3) stripped mortgage-backed securities (ldquoSMBSrdquo) which are mortgage-backed securities
SR-NASDAQ-2015-011 Amendment No 2 Page 39 of 64
investment companies16 (including investment companies advised by the Adviser) that
invest primarily in the foregoing types of debt instruments17 (collectively ldquoFloating Rate
Debt Instrumentsrdquo)
where mortgage payments are divided between paying the loanrsquos principal and paying the loanrsquos interest (4) collateralized mortgage obligations (ldquoCMOsrdquo) and real estate mortgage investment conduits (ldquoREMICsrdquo) which are mortgage-backed securities that are divided into multiple classes with each class being entitled to a different share of the principal and interest payments received from the pool of underlying assets
15 The floating-rate loans in which the Fund will invest will represent amounts borrowed by companies or other entities from banks and other lenders and a significant portion of such floating-rate loans may be rated below investment grade or unrated Floating-rate loans held by the Fund may be senior or subordinate obligations of the borrower and may or may not be secured by collateral First lien senior secured floating-rate loans are referred to herein as ldquosenior loansrdquo Floating-rate loans that are not senior loans (ie unsecured floating-rate loans and secured floating-rate loans that are not first lien floating-rate loans) are referred to herein as ldquojunior loansrdquo The Fund will generally invest in floating-rate loans that the Adviser deems to be liquid with readily available prices notwithstanding the foregoing the Fund may invest in floating-rate loans that are deemed illiquid so long as the Fund complies with the 15 limitation on investments of its net assets in illiquid assets described below under ldquoInvestment Restrictionsrdquo
16 The Fund currently anticipates investing only in registered open-end investment companies that are listed and traded in the US on registered exchanges (ie other ETFs) An ETF is an investment company registered under the 1940 Act that holds a portfolio of securities Many ETFs are designed to track the performance of a securities index including industry sector country and region indexes The Fund may invest in the securities of ETFs in excess of the limits imposed under the 1940 Act pursuant to exemptive orders obtained by other ETFs and their sponsors from the Commission In addition the Fund may invest in the securities of certain investment companies in excess of the limits imposed under the 1940 Act pursuant to an exemptive order obtained by the Trust and the Adviser from the Commission See Investment Company Act Release No 30377 (February 5 2013) (File No 812-13895) The ETFs in which the Fund may invest include Index Fund Shares (as described in Nasdaq Rule 5705) Portfolio Depository Receipts (as described in Nasdaq Rule 5705) and Managed Fund Shares (as described in Nasdaq Rule 5735) While the Fund may invest in inverse ETFs the Fund will not invest in leveraged or inverse leveraged (eg 2X or -3X) ETFs
SR-NASDAQ-2015-011 Amendment No 2 Page 40 of 64
At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade To be considered
ldquoinvestment graderdquo under normal market conditions rated Floating Rate Debt
Instruments will carry at the time of purchase a rating in the highest four rating
categories of at least one nationally recognized statistical ratings organization
(ldquoNRSROrdquo) (eg BBB- or higher by Standard amp Poorrsquos Ratings Services (ldquoSampPrdquo)
andor Fitch Ratings (ldquoFitchrdquo) or Baa3 or higher by Moodyrsquos Investors Service Inc
(ldquoMoodyrsquosrdquo)18 For unrated securities to be considered ldquoinvestment graderdquo under normal
market conditions such securities will be determined at the time of purchase to be of
comparable quality19 by the Adviser The Fund may invest up to 35 of its net assets in
securities that are at the time of investment rated below investment grade by each
NRSRO rating such securities (or securities that are unrated and determined by the
17 The liquidity of a security especially in the case of asset-backed and mortgage-backed securities will be a substantial factor in the Fundrsquos security selection process Consistent with the discussion below under ldquoInvestment Restrictionsrdquo the Fund will not purchase any Floating Rate Debt Instruments (including asset-backed securities and mortgage-backed securities) that in the Adviserrsquos opinion are illiquid if as a result more than 15 of the value of the Fundrsquos net assets will be invested in illiquid assets
18 For the avoidance of doubt if a security is rated by multiple NRSROs and receives different ratings the Fund will treat the security as being rated in the highest rating category received from an NRSRO
19 Comparable quality of unrated securities will be determined by the Adviser based on fundamental credit analysis of the unrated security and comparable NRSRO-rated securities On a best efforts basis the Adviser will attempt to make a rating determination based on publicly available data In making a ldquocomparable qualityrdquo determination the Adviser may consider for example whether the issuer of the security has issued other rated securities the nature and provisions of the relevant security whether the obligations under the relevant security are guaranteed by another entity and the rating of such guarantor (if any) relevant cash flows macroeconomic analysis andor sector or industry analysis
SR-NASDAQ-2015-011 Amendment No 2 Page 41 of 64
Adviser to be of comparable quality) commonly referred to as ldquohigh yieldrdquo or ldquojunkrdquo
bonds If subsequent to purchase by the Fund a security held by the Fund experiences a
decline in credit quality and falls below investment grade the Fund may continue to hold
the security and it will not cause the Fund to violate the 35 investment limitation
however the security will be taken into account for purposes of determining whether
purchases of additional securities will cause the Fund to violate such limitation
The Fund will limit its investments in asset-backed securities (excluding agency
mortgage-backed securities) and non-agency mortgage-backed securities (in the
aggregate) to 20 of its net assets20 In addition the Fund will limit its investments in
junior loans to 20 of its net assets
The Fund will hold debt securities (including in the aggregate Floating Rate
Debt Instruments and the fixed-rate debt securities described below) of at least 13
non-affiliated issuers
Other Investments
Under normal market conditions the Fund will invest primarily in the Floating
Rate Debt Instruments described above to meet its investment objective In addition the
Fund may invest up to 20 of its net assets in the following types of fixed-rate debt
securities corporate21 and government bonds and notes agency securities22 instruments
20 For the avoidance of doubt there is no limitation on the Fundrsquos investments in agency mortgage-backed securities
21 See footnote 10 above
22 See footnote 11 above
SR-NASDAQ-2015-011 Amendment No 2 Page 42 of 64
of non-US issuers in developed markets privately-issued securities 23 asset-backed
securities 24 mortgage-backed securities 25 municipal bonds money market securities26
and investment companies27 (including investment companies advised by the Adviser)
that invest primarily in the foregoing types of debt securities
Further to pursue its investment objective the Fund may invest up to 20 of the
value of its net assets in exchange-listed options on US Treasury futures contracts and
exchange-listed US Treasury futures contracts28 The use of these derivative
transactions may allow the Fund to obtain net long or short exposures to selected interest
rates These derivatives may also be used to hedge risks including interest rate risks and
credit risks associated with the Fundrsquos portfolio investments The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
23 See footnote 12 above
24 See footnote 13 above
25 See footnote 14 above
26 ldquoMoney market securitiesrdquo for these purposes generally includes short-term high-quality obligations issued or guaranteed by the US Treasury or the agencies or instrumentalities of the US government short-term high-quality securities issued or guaranteed by non-US governments agencies and instrumentalities repurchase agreements commercial paper (both asset-backed and non-assetshybacked) and deposits and other obligations of US and non-US banks and financial institutions
27 See footnote 16 above
28 At least 90 of the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be invested in instruments that trade in markets that are members of the Intermarket Surveillance Group (ldquoISGrdquo) (see footnote 40 below) or are parties to a comprehensive surveillance sharing agreement with the Exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 43 of 64
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index
Investment Restrictions
The Fund will not invest 25 or more of the value of its total assets in securities
of issuers in any one industry This restriction does not apply to (a) obligations issued or
guaranteed by the US government its agencies or instrumentalities or (b) securities of
other investment companies29
The Fund may hold up to an aggregate amount of 15 of its net assets in illiquid
assets (calculated at the time of investment) including Rule 144A securities deemed
illiquid by the Adviser30 The Fund will monitor its portfolio liquidity on an ongoing
basis to determine whether in light of current circumstances an adequate level of
liquidity is being maintained and will consider taking appropriate steps in order to
maintain adequate liquidity if through a change in values net assets or other
circumstances more than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid
assets include securities subject to contractual or other restrictions on resale and other
29 See Form N-1A Item 9 The Commission has taken the position that a fund is concentrated if it invests more than 25 of the value of its total assets in any one industry See eg Investment Company Act Release No 9011 (October 30 1975) 40 FR 54241 (November 21 1975)
30 In reaching liquidity decisions the Adviser may consider the following factors the frequency of trades and quotes for the security the number of dealers wishing to purchase or sell the security and the number of other potential purchasers dealer undertakings to make a market in the security and the nature of the security and the nature of the marketplace in which it trades (eg the time needed to dispose of the security the method of soliciting offers and the mechanics of transfer)
SR-NASDAQ-2015-011 Amendment No 2 Page 44 of 64
instruments that lack readily available markets as determined in accordance with
Commission staff guidance31
The Fund will not invest in non-US equity securities
Creation and Redemption of Shares
The Fund will issue and redeem Shares on a continuous basis at net asset value
(ldquoNAVrdquo)32 only in large blocks of Shares (ldquoCreation Unitsrdquo) in transactions with
authorized participants generally including broker-dealers and large institutional
investors (ldquoAuthorized Participantsrdquo) Creation Units generally will consist of 50000
Shares although this may change from time to time Creation Units however are not
expected to consist of less than 50000 Shares As described in the Registration
Statement and consistent with the Exemptive Relief the Fund will issue and redeem
Creation Units in exchange for an in-kind portfolio of instruments andor cash in lieu of
31 The Commission has stated that long-standing Commission guidelines have required open-end funds to hold no more than 15 of their net assets in illiquid securities and other illiquid assets See Investment Company Act Release No 28193 (March 11 2008) 73 FR 14618 (March 18 2008) footnote 34 See also Investment Company Act Release No 5847 (October 21 1969) 35 FR 19989 (December 31 1970) (Statement Regarding ldquoRestricted Securitiesrdquo) Investment Company Act Release No 18612 (March 12 1992) 57 FR 9828 (March 20 1992) (Revisions of Guidelines to Form N-1A) A fundrsquos portfolio security is illiquid if it cannot be disposed of in the ordinary course of business within seven days at approximately the value ascribed to it by the fund See Investment Company Act Release No 14983 (March 12 1986) 51 FR 9773 (March 21 1986) (adopting amendments to Rule 2a-7 under the 1940 Act) Investment Company Act Release No 17452 (April 23 1990) 55 FR 17933 (April 30 1990) (adopting Rule 144A under the Securities Act of 1933)
32 The NAV of the Fundrsquos Shares generally will be calculated once daily Monday through Friday as of the close of regular trading on the New York Stock Exchange generally 400 pm Eastern Time (the ldquoNAV Calculation Timerdquo) NAV per Share will be calculated by dividing the Fundrsquos net assets by the number of Fund Shares outstanding For more information regarding the valuation of Fund investments in calculating the Fundrsquos NAV see the Registration Statement
SR-NASDAQ-2015-011 Amendment No 2 Page 45 of 64
such instruments (the ldquoCreation Basketrdquo) In addition if there is a difference between the
NAV attributable to a Creation Unit and the market value of the Creation Basket
exchanged for the Creation Unit the party conveying instruments with the lower value
will pay to the other an amount in cash equal to the difference (referred to as the ldquoCash
Componentrdquo)
Creations and redemptions must be made by or through an Authorized Participant
that has executed an agreement that has been agreed to by the Distributor and BNY with
respect to creations and redemptions of Creation Units All standard orders to create
Creation Units must be received by the transfer agent no later than the closing time of the
regular trading session on the New York Stock Exchange (ordinarily 400 pm Eastern
Time) (the ldquoClosing Timerdquo) in each case on the date such order is placed in order for the
creation of Creation Units to be effected based on the NAV of Shares as next determined
on such date after receipt of the order in proper form Shares may be redeemed only in
Creation Units at their NAV next determined after receipt not later than the Closing Time
of a redemption request in proper form by the Fund through the transfer agent and only
on a business day
The Fundrsquos custodian through the National Securities Clearing Corporation will
make available on each business day prior to the opening of business of the Exchange
the list of the names and quantities of the instruments comprising the Creation Basket as
well as the estimated Cash Component (if any) for that day The published Creation
Basket will apply until a new Creation Basket is announced on the following business
day prior to commencement of trading in the Shares
SR-NASDAQ-2015-011 Amendment No 2 Page 46 of 64
Net Asset Value
The Fundrsquos NAV will be determined as of the close of trading (normally
400 pm Eastern Time) on each day the New York Stock Exchange is open for
business NAV will be calculated for the Fund by taking the market price of the Fundrsquos
total assets including interest or dividends accrued but not yet collected less all
liabilities and dividing such amount by the total number of Shares outstanding The
result rounded to the nearest cent will be the NAV per Share All valuations will be
subject to review by the Board of Trustees of the Trust (ldquoTrust Boardrdquo) or its delegate
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with valuation procedures (which may be revised from time to time) adopted by the Trust
Board (the ldquoValuation Proceduresrdquo) and in accordance with the 1940 Act A market
valuation generally means a valuation (i) obtained from an exchange an independent
pricing service (ldquoPricing Servicerdquo) or a major market maker (or dealer) or (ii) based on a
price quotation or other equivalent indication of value supplied by an exchange a Pricing
Service or a major market maker (or dealer) The information summarized below is
based on the Valuation Procedures as currently in effect however as noted above the
Valuation Procedures are amended from time to time and therefore such information is
subject to change
Certain securities including Floating Rate Debt Instruments in which the Fund
may invest will not be listed on any securities exchange or board of trade Such
securities will typically be bought and sold by institutional investors in individually
negotiated private transactions that function in many respects like an over-the-counter
SR-NASDAQ-2015-011 Amendment No 2 Page 47 of 64
secondary market although typically no formal market makers will exist Certain
securities particularly debt securities will have few or no trades or trade infrequently
and information regarding a specific security may not be widely available or may be
incomplete Accordingly determinations of the fair value of debt securities may be
based on infrequent and dated information Because there is less reliable objective data
available elements of judgment may play a greater role in valuation of debt securities
than for other types of securities Typically Floating Rate Debt Instruments and other
debt securities in which the Fund may invest (other than those described below) will be
valued using information provided by a Pricing Service Debt securities having a
remaining maturity of 60 days or less when purchased will be valued at cost adjusted for
amortization of premiums and accretion of discounts provided the Adviserrsquos pricing
committee (the ldquoPricing Committeerdquo) has determined that the use of amortized cost is an
appropriate reflection of fair value given market and issuer-specific conditions existing at
the time of the determination Overnight repurchase agreements will be valued at cost
and term repurchase agreements (ie those whose maturity exceeds seven days) will be
valued at the average of the bid quotations obtained daily from at least two recognized
dealers
Asset-backed and mortgage-backed securities will generally be valued by using a
Pricing Service If a Pricing Service does not cover a particular asset-backed or
mortgage-backed security or discontinues covering a particular asset-backed or
mortgage-backed security the security will be priced using broker quotes generally
provided by brokers that make or participate in markets in the security To derive values
Pricing Services and broker-dealers may use matrix pricing and valuation models as well
SR-NASDAQ-2015-011 Amendment No 2 Page 48 of 64
as recent market transactions for the same or similar assets As it deems appropriate the
Pricing Committee may determine that a Pricing Service price does not represent an
accurate value of an asset-backed or mortgage-backed security based on broker quotes it
receives a recent trade in the security by the Fund information from a portfolio manager
or other market information In the event that the Pricing Committee determines that the
Pricing Service price is unreliable or inaccurate based on such other information broker
quotes may be used Additionally if the Pricing Committee determines that the price of
an asset-backed or mortgage-backed security obtained from a Pricing Service and
available broker quotes is unreliable or inaccurate due to market conditions or other
reasons or if a Pricing Service price or broker quote is unavailable the security will be
valued using fair value pricing as described below
Equity securities listed on any exchange other than the Exchange will be valued at
the last sale price on the exchange on which they are principally traded on the business
day as of which such value is being determined Equity securities listed on the Exchange
will be valued at the official closing price on the business day as of which such value is
being determined If there has been no sale on such day or no official closing price in
the case of securities traded on the Exchange the securities will be valued using fair
value pricing as described below Equity securities traded on more than one securities
exchange will be valued at the last sale price or official closing price as applicable on
the business day as of which such value is being determined at the close of the exchange
representing the principal market for such securities
Exchange-traded options and futures contracts will be valued at the closing price
in the market where such contracts are principally traded
SR-NASDAQ-2015-011 Amendment No 2 Page 49 of 64
Certain securities including Floating Rate Debt Instruments in which the Fund
will invest will not be able to be priced by pre-established pricing methods Such
securities may be valued by the Trust Board or its delegate at fair value The use of fair
value pricing by the Fund will be governed by the Valuation Procedures and conducted in
accordance with the provisions of the 1940 Act Valuing the Fundrsquos securities using fair
value pricing will result in using prices for those securities that may differ from current
market valuations or official closing prices on the applicable exchange
Availability of Information
The Fundrsquos website (wwwftportfolioscom) which will be publicly available
prior to the public offering of Shares will include a form of the prospectus for the Fund
that may be downloaded The website will include the Sharesrsquo ticker CUSIP and
exchange information along with additional quantitative information updated on a daily
basis including for the Fund (1) daily trading volume the prior business dayrsquos reported
NAV and closing price mid-point of the bidask spread at the time of calculation of such
NAV (the ldquoBidAsk Pricerdquo)33 and a calculation of the premium and discount of the
BidAsk Price against the NAV and (2) data in chart format displaying the frequency
distribution of discounts and premiums of the daily BidAsk Price against the NAV
within appropriate ranges for each of the four previous calendar quarters On each
business day before commencement of trading in Shares in the Regular Market Session34
33 The BidAsk Price of the Fund will be determined using the mid-point of the highest bid and the lowest offer on the Exchange as of the time of calculation of the Fundrsquos NAV The records relating to BidAsk Prices will be retained by the Fund and its service providers
34 See Nasdaq Rule 4120(b)(4) (describing the three trading sessions on the Exchange (1) Pre-Market Session from 4 am to 930 am Eastern Time (2)
SR-NASDAQ-2015-011 Amendment No 2 Page 50 of 64
on the Exchange the Fund will disclose on its website the identities and quantities of the
portfolio of securities and other assets (the ldquoDisclosed Portfoliordquo as defined in Nasdaq
Rule 5735(c)(2)) held by the Fund that will form the basis for the Fundrsquos calculation of
NAV at the end of the business day 35 The Fundrsquos disclosure of derivative positions in
the Disclosed Portfolio will include information that market participants can use to value
these positions intraday On a daily basis the Fund will disclose on the Fundrsquos website
the following information regarding each portfolio holding as applicable to the type of
holding ticker symbol CUSIP number or other identifier if any a description of the
holding (including the type of holding) the identity of the security or other asset or
instrument underlying the holding if any for options the option strike price quantity
held (as measured by for example par value notional value or number of shares
contracts or units) maturity date if any coupon rate if any effective date if any market
value of the holding and percentage weighting of the holding in the Fundrsquos portfolio
The website information will be publicly available at no charge
In addition for the Fund an estimated value defined in Rule 5735(c)(3) as the
ldquoIntraday Indicative Valuerdquo that reflects an estimated intraday value of the Fundrsquos
Disclosed Portfolio will be disseminated Moreover the Intraday Indicative Value
Regular Market Session from 930 am to 4 pm or 415 pm Eastern Time and (3) Post-Market Session from 4 pm or 415 pm to 8 pm Eastern Time)
Under accounting procedures to be followed by the Fund trades made on the prior business day (ldquoTrdquo) will be booked and reflected in NAV on the current business day (ldquoT+1rdquo) Accordingly the Fund will be able to disclose at the beginning of the business day the portfolio that will form the basis for the NAV calculation at the end of the business day
35
SR-NASDAQ-2015-011 Amendment No 2 Page 51 of 64
available on the NASDAQ OMX Information LLC proprietary index data service36 will
be based upon the current value for the components of the Disclosed Portfolio and will be
updated and widely disseminated by one or more major market data vendors and broadly
displayed at least every 15 seconds during the Regular Market Session The Intraday
Indicative Value will be based on quotes and closing prices from the securitiesrsquo local
market and may not reflect events that occur subsequent to the local marketrsquos close
Premiums and discounts between the Intraday Indicative Value and the market price may
occur This should not be viewed as a ldquoreal timerdquo update of the NAV per Share of the
Fund which is calculated only once a day
The dissemination of the Intraday Indicative Value together with the Disclosed
Portfolio will allow investors to determine the value of the underlying portfolio of the
Fund on a daily basis and will provide a close estimate of that value throughout the
trading day
Investors will also be able to obtain the Fundrsquos Statement of Additional
Information (ldquoSAIrdquo) the Fundrsquos annual and semi-annual reports (together ldquoShareholder
Reportsrdquo) and its Form N-CSR and Form N-SAR filed twice a year The Fundrsquos SAI
and Shareholder Reports will be available free upon request from the Fund and those
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or
downloaded from the Commissionrsquos website at wwwsecgov Information regarding
Currently the NASDAQ OMX Global Index Data Service (ldquoGIDSrdquo) is the NASDAQ OMX global index data feed service offering real-time updates daily summary messages and access to widely followed indexes and Intraday Indicative Values for ETFs GIDS provides investment professionals with the daily information needed to track or trade NASDAQ OMX indexes listed ETFs or third-party partner indexes and ETFs
36
SR-NASDAQ-2015-011 Amendment No 2 Page 52 of 64
market price and trading volume of the Shares will be continually available on a real-time
basis throughout the day on brokersrsquo computer screens and other electronic services
Information regarding the previous dayrsquos closing price and trading volume information
for the Shares will be published daily in the financial section of newspapers Quotation
and last sale information for the Shares will be available via Nasdaq proprietary quote
and trade services as well as in accordance with the Unlisted Trading Privileges and the
Consolidated Tape Association (ldquoCTArdquo) plans for the Shares Quotation and last sale
information for the other ETFs in which the Fund will invest will be available via the
quote and trade services of their respective primary exchanges as well as in accordance
with the Unlisted Trading Privileges and the CTA plans as applicable Quotation and
last sale information for US exchange-traded options will be available via the Options
Price Reporting Authority Intraday executable price quotations on Floating Rate Debt
Instruments and other assets not traded on an exchange will be available from major
broker-dealer firms or market data vendors as well as from automated quotation systems
published or other public sources or online information services Additionally the Trade
Reporting and Compliance Engine (ldquoTRACErdquo) of the Financial Industry Regulatory
Authority (ldquoFINRArdquo) will be a source of price information for corporate bonds
privately-issued securities mortgage-backed securities and asset-backed securities to the
extent transactions in such securities are reported to TRACE37 For exchange-traded
Broker-dealers that are FINRA member firms have an obligation to report transactions in specified debt securities to TRACE to the extent required under applicable FINRA rules Generally such debt securities will have at issuance a maturity that exceeds one calendar year
37
SR-NASDAQ-2015-011 Amendment No 2 Page 53 of 64
assets intraday pricing information will be available directly from the applicable listing
exchange
Additional information regarding the Fund and the Shares including investment
strategies risks creation and redemption procedures fees Fund holdings disclosure
policies distributions and taxes will be included in the Registration Statement
Initial and Continued Listing
The Shares will be subject to Rule 5735 which sets forth the initial and continued
listing criteria applicable to Managed Fund Shares The Exchange represents that for
initial andor continued listing the Fund must be in compliance with Rule 10A-338 under
the Act A minimum of 100000 Shares will be outstanding at the commencement of
trading on the Exchange The Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the NAV and the
Disclosed Portfolio will be made available to all market participants at the same time
Trading Halts
With respect to trading halts the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading in the Shares of the Fund Nasdaq will
halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12) Trading may be
halted because of market conditions or for reasons that in the view of the Exchange
make trading in the Shares inadvisable These may include (1) the extent to which
trading is not occurring in the securities andor the other assets constituting the Disclosed
Portfolio of the Fund or (2) whether other unusual conditions or circumstances
See 17 CFR 24010A-3 38
SR-NASDAQ-2015-011 Amendment No 2 Page 54 of 64
detrimental to the maintenance of a fair and orderly market are present Trading in the
Shares also will be subject to Rule 5735(d)(2)(D) which sets forth circumstances under
which Shares of the Fund may be halted
Trading Rules
Nasdaq deems the Shares to be equity securities thus rendering trading in the
Shares subject to Nasdaqrsquos existing rules governing the trading of equity securities
Nasdaq will allow trading in the Shares from 400 am until 800 pm Eastern Time
The Exchange has appropriate rules to facilitate transactions in the Shares during all
trading sessions As provided in Nasdaq Rule 5735(b)(3) the minimum price variation
for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $001
Surveillance
The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws39 The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities laws
The surveillances referred to above generally focus on detecting securities trading
outside their normal patterns which could be indicative of manipulative or other violative
activity When such situations are detected surveillance analysis follows and
FINRA surveils trading on the Exchange pursuant to a regulatory services agreement The Exchange is responsible for FINRArsquos performance under this regulatory services agreement
39
SR-NASDAQ-2015-011 Amendment No 2 Page 55 of 64
investigations are opened where appropriate to review the behavior of all relevant
parties for all relevant trading violations
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 56 of 64
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
SR-NASDAQ-2015-011 Amendment No 2 Page 57 of 64
2 Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
SR-NASDAQ-2015-011 Amendment No 2 Page 58 of 64
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
SR-NASDAQ-2015-011 Amendment No 2 Page 59 of 64
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
SR-NASDAQ-2015-011 Amendment No 2 Page 60 of 64
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 61 of 64
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
SR-NASDAQ-2015-011 Amendment No 2 Page 62 of 64
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
B Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
C Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received From Members Participants or Others
Written comments were neither solicited nor received
III Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Within 45 days of the date of publication of this notice in the Federal Register or
within such longer period (i) as the Commission may designate up to 90 days of such date
if it finds such longer period to be appropriate and publishes its reasons for so finding or
(ii) as to which the Exchange consents the Commission shall (a) by order approve or
disapprove such proposed rule change or (b) institute proceedings to determine whether
the proposed rule change should be disapproved
SR-NASDAQ-2015-011 Amendment No 2 Page 63 of 64
IV Solicitation of Comments
Interested persons are invited to submit written data views and arguments
concerning the foregoing including whether the proposed rule change is consistent with
the Act Comments may be submitted by any of the following methods
Electronic comments
bull Use the Commissionrsquos Internet comment form
(httpwwwsecgovrulessroshtml) or
bull Send an e-mail to rule-commentssecgov Please include File Number
SR-NASDAQ-2015-011 on the subject line
Paper comments
bull Send paper comments in triplicate to Brent J Fields Secretary Securities and
Exchange Commission Station Place 100 F Street NE Washington DC
20549-9303
All submissions should refer to File Number SR-NASDAQ-2015-011 This file number
should be included on the subject line if e-mail is used To help the Commission process
and review your comments more efficiently please use only one method The
Commission will post all comments on the Commissionrsquos Internet website
httpwwwsecgovrulessroshtml
Copies of the submission all subsequent amendments all written statements with
respect to the proposed rule change that are filed with the Commission and all written
communications relating to the proposed rule change between the Commission and any
person other than those that may be withheld from the public in accordance with the
provisions of 5 USC 552 will be available for website viewing and printing in the
Commissionrsquos Public Reference Room 100 F Street NE Washington DC 20549 on
SR-NASDAQ-2015-011 Amendment No 2 Page 64 of 64
official business days between the hours of 1000 am and 300 pm Copies of the filing
also will be available for inspection and copying at the principal office of Nasdaq All
comments received will be posted without change the Commission does not edit
personal identifying information from submissions You should submit only information
that you wish to make available publicly
All submissions should refer to File Number SR-NASDAQ-2015-011 and should
be submitted on or before [insert date 21 days from publication in the Federal Register]
For the Commission by the Division of Trading and Markets pursuant to
delegated authority41
Kevin M OrsquoNeill Deputy Secretary
17 CFR 20030-3(a)(12) 41
SR-NASDAQ-2015-011 Amendment No 2 Page 34 of 64
Fund Sharesrdquo)3 The shares of the Fund are collectively referred to herein as the
ldquoSharesrdquo
The text of the proposed rule change is available at
httpnasdaqcchwallstreetcom at Nasdaqrsquos principal office and at the Commissionrsquos
Public Reference Room
II Self-Regulatory Organizationrsquos Statement of the Purpose of and Statutory Basis for the Proposed Rule Change
In its filing with the Commission Nasdaq included statements concerning the
purpose of and basis for the proposed rule change The text of these statements may be
examined at the places specified in Item IV below Nasdaq has prepared summaries set
forth in Sections A B and C below of the most significant aspects of such statements
A Self-Regulatory Organizationrsquos Statement of the Purpose of and Statutory Basis for the Proposed Rule Change
1 Purpose
The Exchange proposes to list and trade the Shares of the Fund under Nasdaq
Rule 5735 which governs the listing and trading of Managed Fund Shares4 on the
3 The Commission approved Nasdaq Rule 5735 in Securities Exchange Act Release No 57962 (June 13 2008) 73 FR 35175 (June 20 2008) (SR-NASDAQ-2008shy039) There are already multiple actively-managed funds listed on the Exchange see eg Securities Exchange Act Release Nos 69464 (April 26 2013) 78 FR 25774 (May 2 2013) (SR-NASDAQ-2013-036) (order approving listing and trading of First Trust Senior Loan Fund) 68972 (February 22 2013) 78 FR 13721 (February 28 2013) (SR-NASDAQ-2012-147) (order approving listing and trading of First Trust High Yield LongShort ETF) 66489 (February 29 2012) 77 FR 13379 (March 6 2012) (SR-NASDAQ-2012-004) (order approving listing and trading of WisdomTree Emerging Markets Corporate Bond Fund) The Exchange believes the proposed rule change raises no significant issues not previously addressed in those prior Commission orders
4 A Managed Fund Share is a security that represents an interest in an investment company registered under the Investment Company Act of 1940 (15 USC 80ashy
SR-NASDAQ-2015-011 Amendment No 2 Page 35 of 64
Exchange The Fund will be an actively-managed exchange-traded fund (ldquoETFrdquo) The
Shares will be offered by the Trust which was established as a Massachusetts business
trust on September 15 20105 The Trust is registered with the Commission as an
investment company and has filed a registration statement on Form N-1A (ldquoRegistration
Statementrdquo) with the Commission6 The Fund will be a series of the Trust The Fund
intends to qualify each year as a regulated investment company (ldquoRICrdquo) under
Subchapter M of the Internal Revenue Code of 1986 as amended
First Trust Advisors LP will be the investment adviser (ldquoAdviserrdquo) to the Fund
First Trust Portfolios LP (the ldquoDistributorrdquo) will be the principal underwriter and
distributor of the Fundrsquos Shares The Bank of New York Mellon Corporation (ldquoBNYrdquo)
will act as the administrator accounting agent custodian and transfer agent to the Fund
1) (the ldquo1940 Actrdquo) organized as an open-end investment company or similar entity that invests in a portfolio of securities selected by its investment adviser consistent with its investment objectives and policies In contrast an open-end investment company that issues Index Fund Shares listed and traded on the Exchange under Nasdaq Rule 5705 seeks to provide investment results that correspond generally to the price and yield performance of a specific foreign or domestic stock index fixed income securities index or combination thereof
5 The Commission has issued an order upon which the Trust may rely granting certain exemptive relief under the 1940 Act See Investment Company Act Release No 30029 (April 10 2012) (File No 812-13795) (the ldquoExemptive Reliefrdquo) In addition the Commission has issued no-action relief upon which the Trust may rely pertaining to the Fundrsquos ability to invest in derivatives notwithstanding certain representations in the application for the Exemptive Relief See Commission No-Action Letter (December 6 2012)
6 See Post-Effective Amendment No 104 to Registration Statement on Form N-1A for the Trust dated January 29 2015 (File Nos 333-174332 and 811-22559) The descriptions of the Fund and the Shares contained herein are based in part on information in the Registration Statement
7
SR-NASDAQ-2015-011 Amendment No 2 Page 36 of 64
Paragraph (g) of Rule 5735 provides that if the investment adviser to the
investment company issuing Managed Fund Shares is affiliated with a broker-dealer
such investment adviser shall erect a ldquofire wallrdquo between the investment adviser and the
broker-dealer with respect to access to information concerning the composition andor
changes to such investment company portfolio7 In addition paragraph (g) further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio Rule 5735(g) is similar
to Nasdaq Rule 5705(b)(5)(A)(i) however paragraph (g) in connection with the
establishment of a ldquofire wallrdquo between the investment adviser and the broker-dealer
reflects the applicable open-end fundrsquos portfolio not an underlying benchmark index as
is the case with index-based funds The Adviser is not a broker-dealer although it is
affiliated with the Distributor a broker-dealer The Adviser has implemented a fire wall
An investment adviser to an open-end fund is required to be registered under the Investment Advisers Act of 1940 (the ldquoAdvisers Actrdquo) As a result the Adviser and its related personnel are subject to the provisions of Rule 204A-1 under the Advisers Act relating to codes of ethics This Rule requires investment advisers to adopt a code of ethics that reflects the fiduciary nature of the relationship to clients as well as compliance with other applicable securities laws Accordingly procedures designed to prevent the communication and misuse of non-public information by an investment adviser must be consistent with Rule 204A-1 under the Advisers Act In addition Rule 206(4)-7 under the Advisers Act makes it unlawful for an investment adviser to provide investment advice to clients unless such investment adviser has (i) adopted and implemented written policies and procedures reasonably designed to prevent violation by the investment adviser and its supervised persons of the Advisers Act and the Commission rules adopted thereunder (ii) implemented at a minimum an annual review regarding the adequacy of the policies and procedures established pursuant to subparagraph (i) above and the effectiveness of their implementation and (iii) designated an individual (who is a supervised person) responsible for administering the policies and procedures adopted under subparagraph (i) above
8
SR-NASDAQ-2015-011 Amendment No 2 Page 37 of 64
with respect to its broker-dealer affiliate regarding access to information concerning the
composition andor changes to the portfolio In addition personnel who make decisions
on the Fundrsquos portfolio composition will be subject to procedures designed to prevent the
use and dissemination of material non-public information regarding the Fundrsquos portfolio
In the event (a) the Adviser becomes or becomes newly affiliated with a broker-dealer
or (b) any new adviser or sub-adviser is a registered broker-dealer or becomes affiliated
with another broker-dealer it will implement a fire wall with respect to its relevant
personnel andor such broker-dealer affiliate as applicable regarding access to
information concerning the composition andor changes to the portfolio and will be
subject to procedures designed to prevent the use and dissemination of material
non-public information regarding such portfolio The Fund does not currently intend to
use a sub-adviser
First Trust Strategic Floating Rate ETF
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions8 at least 80 of its
The term ldquounder normal market conditionsrdquo as used herein includes but is not limited to the absence of adverse market economic political or other conditions including extreme volatility or trading halts in the fixed income markets or the financial markets generally operational issues causing dissemination of inaccurate market information or force majeure type events such as systems failure natural or man-made disaster act of God armed conflict act of terrorism riot or labor disruption or any similar intervening circumstance For temporary defensive purposes during the initial invest-up period and during periods of high cash inflows or outflows the Fund may depart from its principal investment strategies for example it may hold a higher than normal proportion of its assets in cash During such periods the Fund may not be able to achieve its investment objective The Fund may adopt a defensive strategy when the Adviser believes securities in which the Fund normally invests have elevated risks due to political or economic factors and in other extraordinary circumstances
SR-NASDAQ-2015-011 Amendment No 2 Page 38 of 64
net assets in a portfolio of the following types of floating-rate9 debt instruments issued by
US and non-US public- and private-sector entities floating-rate corporate10 and
government bonds and notes floating-rate agency securities 11 floating-rate instruments
of non-US issuers floating-rate privately-issued securities 12 floating-rate asset-backed
securities 13 floating-rate mortgage-backed securities14 floating-rate loans 15 and
9 For the avoidance of doubt the term ldquofloating-raterdquo shall also include similar terms such as ldquovariable-raterdquo and ldquoadjustable-raterdquo
10 The Adviser expects that under normal market conditions generally for a corporate bond to be considered as an eligible investment after taking into account such an investment at least 75 of the Fundrsquos net assets that are invested in floating-rate corporate bonds and as described below fixed-rate corporate bonds (in the aggregate) will be comprised of corporate bonds that have at the time of original issuance $100 million or more par amount outstanding
11 ldquoAgency securitiesrdquo for these purposes generally includes securities issued by the following entities Government National Mortgage Association (Ginnie Mae) Federal National Mortgage Association (Fannie Mae) Federal Home Loan Banks (FHLBanks) Federal Home Loan Mortgage Corporation (Freddie Mac) Farm Credit System (FCS) Farm Credit Banks (FCBanks) Student Loan Marketing Association (Sallie Mae) Resolution Funding Corporation (REFCORP) Financing Corporation (FICO) and the Farm Credit System (FCS) Financial Assistance Corporation (FAC) Agency securities can include but are not limited to mortgage-backed securities
12 ldquoPrivately-issued securitiesrdquo for these purposes generally includes Rule 144A securities other than mortgage-backed Rule 144A securities Under normal market conditions privately-issued securities will have at the time of original issuance $100 million or more principal amount outstanding to be considered eligible investments
13 Asset-backed securities are securities that are backed by a pool of assets The Fund currently intends to invest in asset-backed securities that are consumer asset-backed securities
14 Mortgage-backed securities which are securities that directly or indirectly represent a participation in or are secured by and payable from mortgage loans on real property will consist of (1) residential mortgage-backed securities (ldquoRMBSrdquo) (2) commercial mortgage-backed securities (ldquoCMBSrdquo) (3) stripped mortgage-backed securities (ldquoSMBSrdquo) which are mortgage-backed securities
SR-NASDAQ-2015-011 Amendment No 2 Page 39 of 64
investment companies16 (including investment companies advised by the Adviser) that
invest primarily in the foregoing types of debt instruments17 (collectively ldquoFloating Rate
Debt Instrumentsrdquo)
where mortgage payments are divided between paying the loanrsquos principal and paying the loanrsquos interest (4) collateralized mortgage obligations (ldquoCMOsrdquo) and real estate mortgage investment conduits (ldquoREMICsrdquo) which are mortgage-backed securities that are divided into multiple classes with each class being entitled to a different share of the principal and interest payments received from the pool of underlying assets
15 The floating-rate loans in which the Fund will invest will represent amounts borrowed by companies or other entities from banks and other lenders and a significant portion of such floating-rate loans may be rated below investment grade or unrated Floating-rate loans held by the Fund may be senior or subordinate obligations of the borrower and may or may not be secured by collateral First lien senior secured floating-rate loans are referred to herein as ldquosenior loansrdquo Floating-rate loans that are not senior loans (ie unsecured floating-rate loans and secured floating-rate loans that are not first lien floating-rate loans) are referred to herein as ldquojunior loansrdquo The Fund will generally invest in floating-rate loans that the Adviser deems to be liquid with readily available prices notwithstanding the foregoing the Fund may invest in floating-rate loans that are deemed illiquid so long as the Fund complies with the 15 limitation on investments of its net assets in illiquid assets described below under ldquoInvestment Restrictionsrdquo
16 The Fund currently anticipates investing only in registered open-end investment companies that are listed and traded in the US on registered exchanges (ie other ETFs) An ETF is an investment company registered under the 1940 Act that holds a portfolio of securities Many ETFs are designed to track the performance of a securities index including industry sector country and region indexes The Fund may invest in the securities of ETFs in excess of the limits imposed under the 1940 Act pursuant to exemptive orders obtained by other ETFs and their sponsors from the Commission In addition the Fund may invest in the securities of certain investment companies in excess of the limits imposed under the 1940 Act pursuant to an exemptive order obtained by the Trust and the Adviser from the Commission See Investment Company Act Release No 30377 (February 5 2013) (File No 812-13895) The ETFs in which the Fund may invest include Index Fund Shares (as described in Nasdaq Rule 5705) Portfolio Depository Receipts (as described in Nasdaq Rule 5705) and Managed Fund Shares (as described in Nasdaq Rule 5735) While the Fund may invest in inverse ETFs the Fund will not invest in leveraged or inverse leveraged (eg 2X or -3X) ETFs
SR-NASDAQ-2015-011 Amendment No 2 Page 40 of 64
At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade To be considered
ldquoinvestment graderdquo under normal market conditions rated Floating Rate Debt
Instruments will carry at the time of purchase a rating in the highest four rating
categories of at least one nationally recognized statistical ratings organization
(ldquoNRSROrdquo) (eg BBB- or higher by Standard amp Poorrsquos Ratings Services (ldquoSampPrdquo)
andor Fitch Ratings (ldquoFitchrdquo) or Baa3 or higher by Moodyrsquos Investors Service Inc
(ldquoMoodyrsquosrdquo)18 For unrated securities to be considered ldquoinvestment graderdquo under normal
market conditions such securities will be determined at the time of purchase to be of
comparable quality19 by the Adviser The Fund may invest up to 35 of its net assets in
securities that are at the time of investment rated below investment grade by each
NRSRO rating such securities (or securities that are unrated and determined by the
17 The liquidity of a security especially in the case of asset-backed and mortgage-backed securities will be a substantial factor in the Fundrsquos security selection process Consistent with the discussion below under ldquoInvestment Restrictionsrdquo the Fund will not purchase any Floating Rate Debt Instruments (including asset-backed securities and mortgage-backed securities) that in the Adviserrsquos opinion are illiquid if as a result more than 15 of the value of the Fundrsquos net assets will be invested in illiquid assets
18 For the avoidance of doubt if a security is rated by multiple NRSROs and receives different ratings the Fund will treat the security as being rated in the highest rating category received from an NRSRO
19 Comparable quality of unrated securities will be determined by the Adviser based on fundamental credit analysis of the unrated security and comparable NRSRO-rated securities On a best efforts basis the Adviser will attempt to make a rating determination based on publicly available data In making a ldquocomparable qualityrdquo determination the Adviser may consider for example whether the issuer of the security has issued other rated securities the nature and provisions of the relevant security whether the obligations under the relevant security are guaranteed by another entity and the rating of such guarantor (if any) relevant cash flows macroeconomic analysis andor sector or industry analysis
SR-NASDAQ-2015-011 Amendment No 2 Page 41 of 64
Adviser to be of comparable quality) commonly referred to as ldquohigh yieldrdquo or ldquojunkrdquo
bonds If subsequent to purchase by the Fund a security held by the Fund experiences a
decline in credit quality and falls below investment grade the Fund may continue to hold
the security and it will not cause the Fund to violate the 35 investment limitation
however the security will be taken into account for purposes of determining whether
purchases of additional securities will cause the Fund to violate such limitation
The Fund will limit its investments in asset-backed securities (excluding agency
mortgage-backed securities) and non-agency mortgage-backed securities (in the
aggregate) to 20 of its net assets20 In addition the Fund will limit its investments in
junior loans to 20 of its net assets
The Fund will hold debt securities (including in the aggregate Floating Rate
Debt Instruments and the fixed-rate debt securities described below) of at least 13
non-affiliated issuers
Other Investments
Under normal market conditions the Fund will invest primarily in the Floating
Rate Debt Instruments described above to meet its investment objective In addition the
Fund may invest up to 20 of its net assets in the following types of fixed-rate debt
securities corporate21 and government bonds and notes agency securities22 instruments
20 For the avoidance of doubt there is no limitation on the Fundrsquos investments in agency mortgage-backed securities
21 See footnote 10 above
22 See footnote 11 above
SR-NASDAQ-2015-011 Amendment No 2 Page 42 of 64
of non-US issuers in developed markets privately-issued securities 23 asset-backed
securities 24 mortgage-backed securities 25 municipal bonds money market securities26
and investment companies27 (including investment companies advised by the Adviser)
that invest primarily in the foregoing types of debt securities
Further to pursue its investment objective the Fund may invest up to 20 of the
value of its net assets in exchange-listed options on US Treasury futures contracts and
exchange-listed US Treasury futures contracts28 The use of these derivative
transactions may allow the Fund to obtain net long or short exposures to selected interest
rates These derivatives may also be used to hedge risks including interest rate risks and
credit risks associated with the Fundrsquos portfolio investments The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
23 See footnote 12 above
24 See footnote 13 above
25 See footnote 14 above
26 ldquoMoney market securitiesrdquo for these purposes generally includes short-term high-quality obligations issued or guaranteed by the US Treasury or the agencies or instrumentalities of the US government short-term high-quality securities issued or guaranteed by non-US governments agencies and instrumentalities repurchase agreements commercial paper (both asset-backed and non-assetshybacked) and deposits and other obligations of US and non-US banks and financial institutions
27 See footnote 16 above
28 At least 90 of the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be invested in instruments that trade in markets that are members of the Intermarket Surveillance Group (ldquoISGrdquo) (see footnote 40 below) or are parties to a comprehensive surveillance sharing agreement with the Exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 43 of 64
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index
Investment Restrictions
The Fund will not invest 25 or more of the value of its total assets in securities
of issuers in any one industry This restriction does not apply to (a) obligations issued or
guaranteed by the US government its agencies or instrumentalities or (b) securities of
other investment companies29
The Fund may hold up to an aggregate amount of 15 of its net assets in illiquid
assets (calculated at the time of investment) including Rule 144A securities deemed
illiquid by the Adviser30 The Fund will monitor its portfolio liquidity on an ongoing
basis to determine whether in light of current circumstances an adequate level of
liquidity is being maintained and will consider taking appropriate steps in order to
maintain adequate liquidity if through a change in values net assets or other
circumstances more than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid
assets include securities subject to contractual or other restrictions on resale and other
29 See Form N-1A Item 9 The Commission has taken the position that a fund is concentrated if it invests more than 25 of the value of its total assets in any one industry See eg Investment Company Act Release No 9011 (October 30 1975) 40 FR 54241 (November 21 1975)
30 In reaching liquidity decisions the Adviser may consider the following factors the frequency of trades and quotes for the security the number of dealers wishing to purchase or sell the security and the number of other potential purchasers dealer undertakings to make a market in the security and the nature of the security and the nature of the marketplace in which it trades (eg the time needed to dispose of the security the method of soliciting offers and the mechanics of transfer)
SR-NASDAQ-2015-011 Amendment No 2 Page 44 of 64
instruments that lack readily available markets as determined in accordance with
Commission staff guidance31
The Fund will not invest in non-US equity securities
Creation and Redemption of Shares
The Fund will issue and redeem Shares on a continuous basis at net asset value
(ldquoNAVrdquo)32 only in large blocks of Shares (ldquoCreation Unitsrdquo) in transactions with
authorized participants generally including broker-dealers and large institutional
investors (ldquoAuthorized Participantsrdquo) Creation Units generally will consist of 50000
Shares although this may change from time to time Creation Units however are not
expected to consist of less than 50000 Shares As described in the Registration
Statement and consistent with the Exemptive Relief the Fund will issue and redeem
Creation Units in exchange for an in-kind portfolio of instruments andor cash in lieu of
31 The Commission has stated that long-standing Commission guidelines have required open-end funds to hold no more than 15 of their net assets in illiquid securities and other illiquid assets See Investment Company Act Release No 28193 (March 11 2008) 73 FR 14618 (March 18 2008) footnote 34 See also Investment Company Act Release No 5847 (October 21 1969) 35 FR 19989 (December 31 1970) (Statement Regarding ldquoRestricted Securitiesrdquo) Investment Company Act Release No 18612 (March 12 1992) 57 FR 9828 (March 20 1992) (Revisions of Guidelines to Form N-1A) A fundrsquos portfolio security is illiquid if it cannot be disposed of in the ordinary course of business within seven days at approximately the value ascribed to it by the fund See Investment Company Act Release No 14983 (March 12 1986) 51 FR 9773 (March 21 1986) (adopting amendments to Rule 2a-7 under the 1940 Act) Investment Company Act Release No 17452 (April 23 1990) 55 FR 17933 (April 30 1990) (adopting Rule 144A under the Securities Act of 1933)
32 The NAV of the Fundrsquos Shares generally will be calculated once daily Monday through Friday as of the close of regular trading on the New York Stock Exchange generally 400 pm Eastern Time (the ldquoNAV Calculation Timerdquo) NAV per Share will be calculated by dividing the Fundrsquos net assets by the number of Fund Shares outstanding For more information regarding the valuation of Fund investments in calculating the Fundrsquos NAV see the Registration Statement
SR-NASDAQ-2015-011 Amendment No 2 Page 45 of 64
such instruments (the ldquoCreation Basketrdquo) In addition if there is a difference between the
NAV attributable to a Creation Unit and the market value of the Creation Basket
exchanged for the Creation Unit the party conveying instruments with the lower value
will pay to the other an amount in cash equal to the difference (referred to as the ldquoCash
Componentrdquo)
Creations and redemptions must be made by or through an Authorized Participant
that has executed an agreement that has been agreed to by the Distributor and BNY with
respect to creations and redemptions of Creation Units All standard orders to create
Creation Units must be received by the transfer agent no later than the closing time of the
regular trading session on the New York Stock Exchange (ordinarily 400 pm Eastern
Time) (the ldquoClosing Timerdquo) in each case on the date such order is placed in order for the
creation of Creation Units to be effected based on the NAV of Shares as next determined
on such date after receipt of the order in proper form Shares may be redeemed only in
Creation Units at their NAV next determined after receipt not later than the Closing Time
of a redemption request in proper form by the Fund through the transfer agent and only
on a business day
The Fundrsquos custodian through the National Securities Clearing Corporation will
make available on each business day prior to the opening of business of the Exchange
the list of the names and quantities of the instruments comprising the Creation Basket as
well as the estimated Cash Component (if any) for that day The published Creation
Basket will apply until a new Creation Basket is announced on the following business
day prior to commencement of trading in the Shares
SR-NASDAQ-2015-011 Amendment No 2 Page 46 of 64
Net Asset Value
The Fundrsquos NAV will be determined as of the close of trading (normally
400 pm Eastern Time) on each day the New York Stock Exchange is open for
business NAV will be calculated for the Fund by taking the market price of the Fundrsquos
total assets including interest or dividends accrued but not yet collected less all
liabilities and dividing such amount by the total number of Shares outstanding The
result rounded to the nearest cent will be the NAV per Share All valuations will be
subject to review by the Board of Trustees of the Trust (ldquoTrust Boardrdquo) or its delegate
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with valuation procedures (which may be revised from time to time) adopted by the Trust
Board (the ldquoValuation Proceduresrdquo) and in accordance with the 1940 Act A market
valuation generally means a valuation (i) obtained from an exchange an independent
pricing service (ldquoPricing Servicerdquo) or a major market maker (or dealer) or (ii) based on a
price quotation or other equivalent indication of value supplied by an exchange a Pricing
Service or a major market maker (or dealer) The information summarized below is
based on the Valuation Procedures as currently in effect however as noted above the
Valuation Procedures are amended from time to time and therefore such information is
subject to change
Certain securities including Floating Rate Debt Instruments in which the Fund
may invest will not be listed on any securities exchange or board of trade Such
securities will typically be bought and sold by institutional investors in individually
negotiated private transactions that function in many respects like an over-the-counter
SR-NASDAQ-2015-011 Amendment No 2 Page 47 of 64
secondary market although typically no formal market makers will exist Certain
securities particularly debt securities will have few or no trades or trade infrequently
and information regarding a specific security may not be widely available or may be
incomplete Accordingly determinations of the fair value of debt securities may be
based on infrequent and dated information Because there is less reliable objective data
available elements of judgment may play a greater role in valuation of debt securities
than for other types of securities Typically Floating Rate Debt Instruments and other
debt securities in which the Fund may invest (other than those described below) will be
valued using information provided by a Pricing Service Debt securities having a
remaining maturity of 60 days or less when purchased will be valued at cost adjusted for
amortization of premiums and accretion of discounts provided the Adviserrsquos pricing
committee (the ldquoPricing Committeerdquo) has determined that the use of amortized cost is an
appropriate reflection of fair value given market and issuer-specific conditions existing at
the time of the determination Overnight repurchase agreements will be valued at cost
and term repurchase agreements (ie those whose maturity exceeds seven days) will be
valued at the average of the bid quotations obtained daily from at least two recognized
dealers
Asset-backed and mortgage-backed securities will generally be valued by using a
Pricing Service If a Pricing Service does not cover a particular asset-backed or
mortgage-backed security or discontinues covering a particular asset-backed or
mortgage-backed security the security will be priced using broker quotes generally
provided by brokers that make or participate in markets in the security To derive values
Pricing Services and broker-dealers may use matrix pricing and valuation models as well
SR-NASDAQ-2015-011 Amendment No 2 Page 48 of 64
as recent market transactions for the same or similar assets As it deems appropriate the
Pricing Committee may determine that a Pricing Service price does not represent an
accurate value of an asset-backed or mortgage-backed security based on broker quotes it
receives a recent trade in the security by the Fund information from a portfolio manager
or other market information In the event that the Pricing Committee determines that the
Pricing Service price is unreliable or inaccurate based on such other information broker
quotes may be used Additionally if the Pricing Committee determines that the price of
an asset-backed or mortgage-backed security obtained from a Pricing Service and
available broker quotes is unreliable or inaccurate due to market conditions or other
reasons or if a Pricing Service price or broker quote is unavailable the security will be
valued using fair value pricing as described below
Equity securities listed on any exchange other than the Exchange will be valued at
the last sale price on the exchange on which they are principally traded on the business
day as of which such value is being determined Equity securities listed on the Exchange
will be valued at the official closing price on the business day as of which such value is
being determined If there has been no sale on such day or no official closing price in
the case of securities traded on the Exchange the securities will be valued using fair
value pricing as described below Equity securities traded on more than one securities
exchange will be valued at the last sale price or official closing price as applicable on
the business day as of which such value is being determined at the close of the exchange
representing the principal market for such securities
Exchange-traded options and futures contracts will be valued at the closing price
in the market where such contracts are principally traded
SR-NASDAQ-2015-011 Amendment No 2 Page 49 of 64
Certain securities including Floating Rate Debt Instruments in which the Fund
will invest will not be able to be priced by pre-established pricing methods Such
securities may be valued by the Trust Board or its delegate at fair value The use of fair
value pricing by the Fund will be governed by the Valuation Procedures and conducted in
accordance with the provisions of the 1940 Act Valuing the Fundrsquos securities using fair
value pricing will result in using prices for those securities that may differ from current
market valuations or official closing prices on the applicable exchange
Availability of Information
The Fundrsquos website (wwwftportfolioscom) which will be publicly available
prior to the public offering of Shares will include a form of the prospectus for the Fund
that may be downloaded The website will include the Sharesrsquo ticker CUSIP and
exchange information along with additional quantitative information updated on a daily
basis including for the Fund (1) daily trading volume the prior business dayrsquos reported
NAV and closing price mid-point of the bidask spread at the time of calculation of such
NAV (the ldquoBidAsk Pricerdquo)33 and a calculation of the premium and discount of the
BidAsk Price against the NAV and (2) data in chart format displaying the frequency
distribution of discounts and premiums of the daily BidAsk Price against the NAV
within appropriate ranges for each of the four previous calendar quarters On each
business day before commencement of trading in Shares in the Regular Market Session34
33 The BidAsk Price of the Fund will be determined using the mid-point of the highest bid and the lowest offer on the Exchange as of the time of calculation of the Fundrsquos NAV The records relating to BidAsk Prices will be retained by the Fund and its service providers
34 See Nasdaq Rule 4120(b)(4) (describing the three trading sessions on the Exchange (1) Pre-Market Session from 4 am to 930 am Eastern Time (2)
SR-NASDAQ-2015-011 Amendment No 2 Page 50 of 64
on the Exchange the Fund will disclose on its website the identities and quantities of the
portfolio of securities and other assets (the ldquoDisclosed Portfoliordquo as defined in Nasdaq
Rule 5735(c)(2)) held by the Fund that will form the basis for the Fundrsquos calculation of
NAV at the end of the business day 35 The Fundrsquos disclosure of derivative positions in
the Disclosed Portfolio will include information that market participants can use to value
these positions intraday On a daily basis the Fund will disclose on the Fundrsquos website
the following information regarding each portfolio holding as applicable to the type of
holding ticker symbol CUSIP number or other identifier if any a description of the
holding (including the type of holding) the identity of the security or other asset or
instrument underlying the holding if any for options the option strike price quantity
held (as measured by for example par value notional value or number of shares
contracts or units) maturity date if any coupon rate if any effective date if any market
value of the holding and percentage weighting of the holding in the Fundrsquos portfolio
The website information will be publicly available at no charge
In addition for the Fund an estimated value defined in Rule 5735(c)(3) as the
ldquoIntraday Indicative Valuerdquo that reflects an estimated intraday value of the Fundrsquos
Disclosed Portfolio will be disseminated Moreover the Intraday Indicative Value
Regular Market Session from 930 am to 4 pm or 415 pm Eastern Time and (3) Post-Market Session from 4 pm or 415 pm to 8 pm Eastern Time)
Under accounting procedures to be followed by the Fund trades made on the prior business day (ldquoTrdquo) will be booked and reflected in NAV on the current business day (ldquoT+1rdquo) Accordingly the Fund will be able to disclose at the beginning of the business day the portfolio that will form the basis for the NAV calculation at the end of the business day
35
SR-NASDAQ-2015-011 Amendment No 2 Page 51 of 64
available on the NASDAQ OMX Information LLC proprietary index data service36 will
be based upon the current value for the components of the Disclosed Portfolio and will be
updated and widely disseminated by one or more major market data vendors and broadly
displayed at least every 15 seconds during the Regular Market Session The Intraday
Indicative Value will be based on quotes and closing prices from the securitiesrsquo local
market and may not reflect events that occur subsequent to the local marketrsquos close
Premiums and discounts between the Intraday Indicative Value and the market price may
occur This should not be viewed as a ldquoreal timerdquo update of the NAV per Share of the
Fund which is calculated only once a day
The dissemination of the Intraday Indicative Value together with the Disclosed
Portfolio will allow investors to determine the value of the underlying portfolio of the
Fund on a daily basis and will provide a close estimate of that value throughout the
trading day
Investors will also be able to obtain the Fundrsquos Statement of Additional
Information (ldquoSAIrdquo) the Fundrsquos annual and semi-annual reports (together ldquoShareholder
Reportsrdquo) and its Form N-CSR and Form N-SAR filed twice a year The Fundrsquos SAI
and Shareholder Reports will be available free upon request from the Fund and those
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or
downloaded from the Commissionrsquos website at wwwsecgov Information regarding
Currently the NASDAQ OMX Global Index Data Service (ldquoGIDSrdquo) is the NASDAQ OMX global index data feed service offering real-time updates daily summary messages and access to widely followed indexes and Intraday Indicative Values for ETFs GIDS provides investment professionals with the daily information needed to track or trade NASDAQ OMX indexes listed ETFs or third-party partner indexes and ETFs
36
SR-NASDAQ-2015-011 Amendment No 2 Page 52 of 64
market price and trading volume of the Shares will be continually available on a real-time
basis throughout the day on brokersrsquo computer screens and other electronic services
Information regarding the previous dayrsquos closing price and trading volume information
for the Shares will be published daily in the financial section of newspapers Quotation
and last sale information for the Shares will be available via Nasdaq proprietary quote
and trade services as well as in accordance with the Unlisted Trading Privileges and the
Consolidated Tape Association (ldquoCTArdquo) plans for the Shares Quotation and last sale
information for the other ETFs in which the Fund will invest will be available via the
quote and trade services of their respective primary exchanges as well as in accordance
with the Unlisted Trading Privileges and the CTA plans as applicable Quotation and
last sale information for US exchange-traded options will be available via the Options
Price Reporting Authority Intraday executable price quotations on Floating Rate Debt
Instruments and other assets not traded on an exchange will be available from major
broker-dealer firms or market data vendors as well as from automated quotation systems
published or other public sources or online information services Additionally the Trade
Reporting and Compliance Engine (ldquoTRACErdquo) of the Financial Industry Regulatory
Authority (ldquoFINRArdquo) will be a source of price information for corporate bonds
privately-issued securities mortgage-backed securities and asset-backed securities to the
extent transactions in such securities are reported to TRACE37 For exchange-traded
Broker-dealers that are FINRA member firms have an obligation to report transactions in specified debt securities to TRACE to the extent required under applicable FINRA rules Generally such debt securities will have at issuance a maturity that exceeds one calendar year
37
SR-NASDAQ-2015-011 Amendment No 2 Page 53 of 64
assets intraday pricing information will be available directly from the applicable listing
exchange
Additional information regarding the Fund and the Shares including investment
strategies risks creation and redemption procedures fees Fund holdings disclosure
policies distributions and taxes will be included in the Registration Statement
Initial and Continued Listing
The Shares will be subject to Rule 5735 which sets forth the initial and continued
listing criteria applicable to Managed Fund Shares The Exchange represents that for
initial andor continued listing the Fund must be in compliance with Rule 10A-338 under
the Act A minimum of 100000 Shares will be outstanding at the commencement of
trading on the Exchange The Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the NAV and the
Disclosed Portfolio will be made available to all market participants at the same time
Trading Halts
With respect to trading halts the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading in the Shares of the Fund Nasdaq will
halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12) Trading may be
halted because of market conditions or for reasons that in the view of the Exchange
make trading in the Shares inadvisable These may include (1) the extent to which
trading is not occurring in the securities andor the other assets constituting the Disclosed
Portfolio of the Fund or (2) whether other unusual conditions or circumstances
See 17 CFR 24010A-3 38
SR-NASDAQ-2015-011 Amendment No 2 Page 54 of 64
detrimental to the maintenance of a fair and orderly market are present Trading in the
Shares also will be subject to Rule 5735(d)(2)(D) which sets forth circumstances under
which Shares of the Fund may be halted
Trading Rules
Nasdaq deems the Shares to be equity securities thus rendering trading in the
Shares subject to Nasdaqrsquos existing rules governing the trading of equity securities
Nasdaq will allow trading in the Shares from 400 am until 800 pm Eastern Time
The Exchange has appropriate rules to facilitate transactions in the Shares during all
trading sessions As provided in Nasdaq Rule 5735(b)(3) the minimum price variation
for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $001
Surveillance
The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws39 The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities laws
The surveillances referred to above generally focus on detecting securities trading
outside their normal patterns which could be indicative of manipulative or other violative
activity When such situations are detected surveillance analysis follows and
FINRA surveils trading on the Exchange pursuant to a regulatory services agreement The Exchange is responsible for FINRArsquos performance under this regulatory services agreement
39
SR-NASDAQ-2015-011 Amendment No 2 Page 55 of 64
investigations are opened where appropriate to review the behavior of all relevant
parties for all relevant trading violations
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 56 of 64
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
SR-NASDAQ-2015-011 Amendment No 2 Page 57 of 64
2 Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
SR-NASDAQ-2015-011 Amendment No 2 Page 58 of 64
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
SR-NASDAQ-2015-011 Amendment No 2 Page 59 of 64
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
SR-NASDAQ-2015-011 Amendment No 2 Page 60 of 64
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 61 of 64
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
SR-NASDAQ-2015-011 Amendment No 2 Page 62 of 64
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
B Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
C Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received From Members Participants or Others
Written comments were neither solicited nor received
III Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Within 45 days of the date of publication of this notice in the Federal Register or
within such longer period (i) as the Commission may designate up to 90 days of such date
if it finds such longer period to be appropriate and publishes its reasons for so finding or
(ii) as to which the Exchange consents the Commission shall (a) by order approve or
disapprove such proposed rule change or (b) institute proceedings to determine whether
the proposed rule change should be disapproved
SR-NASDAQ-2015-011 Amendment No 2 Page 63 of 64
IV Solicitation of Comments
Interested persons are invited to submit written data views and arguments
concerning the foregoing including whether the proposed rule change is consistent with
the Act Comments may be submitted by any of the following methods
Electronic comments
bull Use the Commissionrsquos Internet comment form
(httpwwwsecgovrulessroshtml) or
bull Send an e-mail to rule-commentssecgov Please include File Number
SR-NASDAQ-2015-011 on the subject line
Paper comments
bull Send paper comments in triplicate to Brent J Fields Secretary Securities and
Exchange Commission Station Place 100 F Street NE Washington DC
20549-9303
All submissions should refer to File Number SR-NASDAQ-2015-011 This file number
should be included on the subject line if e-mail is used To help the Commission process
and review your comments more efficiently please use only one method The
Commission will post all comments on the Commissionrsquos Internet website
httpwwwsecgovrulessroshtml
Copies of the submission all subsequent amendments all written statements with
respect to the proposed rule change that are filed with the Commission and all written
communications relating to the proposed rule change between the Commission and any
person other than those that may be withheld from the public in accordance with the
provisions of 5 USC 552 will be available for website viewing and printing in the
Commissionrsquos Public Reference Room 100 F Street NE Washington DC 20549 on
SR-NASDAQ-2015-011 Amendment No 2 Page 64 of 64
official business days between the hours of 1000 am and 300 pm Copies of the filing
also will be available for inspection and copying at the principal office of Nasdaq All
comments received will be posted without change the Commission does not edit
personal identifying information from submissions You should submit only information
that you wish to make available publicly
All submissions should refer to File Number SR-NASDAQ-2015-011 and should
be submitted on or before [insert date 21 days from publication in the Federal Register]
For the Commission by the Division of Trading and Markets pursuant to
delegated authority41
Kevin M OrsquoNeill Deputy Secretary
17 CFR 20030-3(a)(12) 41
SR-NASDAQ-2015-011 Amendment No 2 Page 35 of 64
Exchange The Fund will be an actively-managed exchange-traded fund (ldquoETFrdquo) The
Shares will be offered by the Trust which was established as a Massachusetts business
trust on September 15 20105 The Trust is registered with the Commission as an
investment company and has filed a registration statement on Form N-1A (ldquoRegistration
Statementrdquo) with the Commission6 The Fund will be a series of the Trust The Fund
intends to qualify each year as a regulated investment company (ldquoRICrdquo) under
Subchapter M of the Internal Revenue Code of 1986 as amended
First Trust Advisors LP will be the investment adviser (ldquoAdviserrdquo) to the Fund
First Trust Portfolios LP (the ldquoDistributorrdquo) will be the principal underwriter and
distributor of the Fundrsquos Shares The Bank of New York Mellon Corporation (ldquoBNYrdquo)
will act as the administrator accounting agent custodian and transfer agent to the Fund
1) (the ldquo1940 Actrdquo) organized as an open-end investment company or similar entity that invests in a portfolio of securities selected by its investment adviser consistent with its investment objectives and policies In contrast an open-end investment company that issues Index Fund Shares listed and traded on the Exchange under Nasdaq Rule 5705 seeks to provide investment results that correspond generally to the price and yield performance of a specific foreign or domestic stock index fixed income securities index or combination thereof
5 The Commission has issued an order upon which the Trust may rely granting certain exemptive relief under the 1940 Act See Investment Company Act Release No 30029 (April 10 2012) (File No 812-13795) (the ldquoExemptive Reliefrdquo) In addition the Commission has issued no-action relief upon which the Trust may rely pertaining to the Fundrsquos ability to invest in derivatives notwithstanding certain representations in the application for the Exemptive Relief See Commission No-Action Letter (December 6 2012)
6 See Post-Effective Amendment No 104 to Registration Statement on Form N-1A for the Trust dated January 29 2015 (File Nos 333-174332 and 811-22559) The descriptions of the Fund and the Shares contained herein are based in part on information in the Registration Statement
7
SR-NASDAQ-2015-011 Amendment No 2 Page 36 of 64
Paragraph (g) of Rule 5735 provides that if the investment adviser to the
investment company issuing Managed Fund Shares is affiliated with a broker-dealer
such investment adviser shall erect a ldquofire wallrdquo between the investment adviser and the
broker-dealer with respect to access to information concerning the composition andor
changes to such investment company portfolio7 In addition paragraph (g) further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio Rule 5735(g) is similar
to Nasdaq Rule 5705(b)(5)(A)(i) however paragraph (g) in connection with the
establishment of a ldquofire wallrdquo between the investment adviser and the broker-dealer
reflects the applicable open-end fundrsquos portfolio not an underlying benchmark index as
is the case with index-based funds The Adviser is not a broker-dealer although it is
affiliated with the Distributor a broker-dealer The Adviser has implemented a fire wall
An investment adviser to an open-end fund is required to be registered under the Investment Advisers Act of 1940 (the ldquoAdvisers Actrdquo) As a result the Adviser and its related personnel are subject to the provisions of Rule 204A-1 under the Advisers Act relating to codes of ethics This Rule requires investment advisers to adopt a code of ethics that reflects the fiduciary nature of the relationship to clients as well as compliance with other applicable securities laws Accordingly procedures designed to prevent the communication and misuse of non-public information by an investment adviser must be consistent with Rule 204A-1 under the Advisers Act In addition Rule 206(4)-7 under the Advisers Act makes it unlawful for an investment adviser to provide investment advice to clients unless such investment adviser has (i) adopted and implemented written policies and procedures reasonably designed to prevent violation by the investment adviser and its supervised persons of the Advisers Act and the Commission rules adopted thereunder (ii) implemented at a minimum an annual review regarding the adequacy of the policies and procedures established pursuant to subparagraph (i) above and the effectiveness of their implementation and (iii) designated an individual (who is a supervised person) responsible for administering the policies and procedures adopted under subparagraph (i) above
8
SR-NASDAQ-2015-011 Amendment No 2 Page 37 of 64
with respect to its broker-dealer affiliate regarding access to information concerning the
composition andor changes to the portfolio In addition personnel who make decisions
on the Fundrsquos portfolio composition will be subject to procedures designed to prevent the
use and dissemination of material non-public information regarding the Fundrsquos portfolio
In the event (a) the Adviser becomes or becomes newly affiliated with a broker-dealer
or (b) any new adviser or sub-adviser is a registered broker-dealer or becomes affiliated
with another broker-dealer it will implement a fire wall with respect to its relevant
personnel andor such broker-dealer affiliate as applicable regarding access to
information concerning the composition andor changes to the portfolio and will be
subject to procedures designed to prevent the use and dissemination of material
non-public information regarding such portfolio The Fund does not currently intend to
use a sub-adviser
First Trust Strategic Floating Rate ETF
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions8 at least 80 of its
The term ldquounder normal market conditionsrdquo as used herein includes but is not limited to the absence of adverse market economic political or other conditions including extreme volatility or trading halts in the fixed income markets or the financial markets generally operational issues causing dissemination of inaccurate market information or force majeure type events such as systems failure natural or man-made disaster act of God armed conflict act of terrorism riot or labor disruption or any similar intervening circumstance For temporary defensive purposes during the initial invest-up period and during periods of high cash inflows or outflows the Fund may depart from its principal investment strategies for example it may hold a higher than normal proportion of its assets in cash During such periods the Fund may not be able to achieve its investment objective The Fund may adopt a defensive strategy when the Adviser believes securities in which the Fund normally invests have elevated risks due to political or economic factors and in other extraordinary circumstances
SR-NASDAQ-2015-011 Amendment No 2 Page 38 of 64
net assets in a portfolio of the following types of floating-rate9 debt instruments issued by
US and non-US public- and private-sector entities floating-rate corporate10 and
government bonds and notes floating-rate agency securities 11 floating-rate instruments
of non-US issuers floating-rate privately-issued securities 12 floating-rate asset-backed
securities 13 floating-rate mortgage-backed securities14 floating-rate loans 15 and
9 For the avoidance of doubt the term ldquofloating-raterdquo shall also include similar terms such as ldquovariable-raterdquo and ldquoadjustable-raterdquo
10 The Adviser expects that under normal market conditions generally for a corporate bond to be considered as an eligible investment after taking into account such an investment at least 75 of the Fundrsquos net assets that are invested in floating-rate corporate bonds and as described below fixed-rate corporate bonds (in the aggregate) will be comprised of corporate bonds that have at the time of original issuance $100 million or more par amount outstanding
11 ldquoAgency securitiesrdquo for these purposes generally includes securities issued by the following entities Government National Mortgage Association (Ginnie Mae) Federal National Mortgage Association (Fannie Mae) Federal Home Loan Banks (FHLBanks) Federal Home Loan Mortgage Corporation (Freddie Mac) Farm Credit System (FCS) Farm Credit Banks (FCBanks) Student Loan Marketing Association (Sallie Mae) Resolution Funding Corporation (REFCORP) Financing Corporation (FICO) and the Farm Credit System (FCS) Financial Assistance Corporation (FAC) Agency securities can include but are not limited to mortgage-backed securities
12 ldquoPrivately-issued securitiesrdquo for these purposes generally includes Rule 144A securities other than mortgage-backed Rule 144A securities Under normal market conditions privately-issued securities will have at the time of original issuance $100 million or more principal amount outstanding to be considered eligible investments
13 Asset-backed securities are securities that are backed by a pool of assets The Fund currently intends to invest in asset-backed securities that are consumer asset-backed securities
14 Mortgage-backed securities which are securities that directly or indirectly represent a participation in or are secured by and payable from mortgage loans on real property will consist of (1) residential mortgage-backed securities (ldquoRMBSrdquo) (2) commercial mortgage-backed securities (ldquoCMBSrdquo) (3) stripped mortgage-backed securities (ldquoSMBSrdquo) which are mortgage-backed securities
SR-NASDAQ-2015-011 Amendment No 2 Page 39 of 64
investment companies16 (including investment companies advised by the Adviser) that
invest primarily in the foregoing types of debt instruments17 (collectively ldquoFloating Rate
Debt Instrumentsrdquo)
where mortgage payments are divided between paying the loanrsquos principal and paying the loanrsquos interest (4) collateralized mortgage obligations (ldquoCMOsrdquo) and real estate mortgage investment conduits (ldquoREMICsrdquo) which are mortgage-backed securities that are divided into multiple classes with each class being entitled to a different share of the principal and interest payments received from the pool of underlying assets
15 The floating-rate loans in which the Fund will invest will represent amounts borrowed by companies or other entities from banks and other lenders and a significant portion of such floating-rate loans may be rated below investment grade or unrated Floating-rate loans held by the Fund may be senior or subordinate obligations of the borrower and may or may not be secured by collateral First lien senior secured floating-rate loans are referred to herein as ldquosenior loansrdquo Floating-rate loans that are not senior loans (ie unsecured floating-rate loans and secured floating-rate loans that are not first lien floating-rate loans) are referred to herein as ldquojunior loansrdquo The Fund will generally invest in floating-rate loans that the Adviser deems to be liquid with readily available prices notwithstanding the foregoing the Fund may invest in floating-rate loans that are deemed illiquid so long as the Fund complies with the 15 limitation on investments of its net assets in illiquid assets described below under ldquoInvestment Restrictionsrdquo
16 The Fund currently anticipates investing only in registered open-end investment companies that are listed and traded in the US on registered exchanges (ie other ETFs) An ETF is an investment company registered under the 1940 Act that holds a portfolio of securities Many ETFs are designed to track the performance of a securities index including industry sector country and region indexes The Fund may invest in the securities of ETFs in excess of the limits imposed under the 1940 Act pursuant to exemptive orders obtained by other ETFs and their sponsors from the Commission In addition the Fund may invest in the securities of certain investment companies in excess of the limits imposed under the 1940 Act pursuant to an exemptive order obtained by the Trust and the Adviser from the Commission See Investment Company Act Release No 30377 (February 5 2013) (File No 812-13895) The ETFs in which the Fund may invest include Index Fund Shares (as described in Nasdaq Rule 5705) Portfolio Depository Receipts (as described in Nasdaq Rule 5705) and Managed Fund Shares (as described in Nasdaq Rule 5735) While the Fund may invest in inverse ETFs the Fund will not invest in leveraged or inverse leveraged (eg 2X or -3X) ETFs
SR-NASDAQ-2015-011 Amendment No 2 Page 40 of 64
At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade To be considered
ldquoinvestment graderdquo under normal market conditions rated Floating Rate Debt
Instruments will carry at the time of purchase a rating in the highest four rating
categories of at least one nationally recognized statistical ratings organization
(ldquoNRSROrdquo) (eg BBB- or higher by Standard amp Poorrsquos Ratings Services (ldquoSampPrdquo)
andor Fitch Ratings (ldquoFitchrdquo) or Baa3 or higher by Moodyrsquos Investors Service Inc
(ldquoMoodyrsquosrdquo)18 For unrated securities to be considered ldquoinvestment graderdquo under normal
market conditions such securities will be determined at the time of purchase to be of
comparable quality19 by the Adviser The Fund may invest up to 35 of its net assets in
securities that are at the time of investment rated below investment grade by each
NRSRO rating such securities (or securities that are unrated and determined by the
17 The liquidity of a security especially in the case of asset-backed and mortgage-backed securities will be a substantial factor in the Fundrsquos security selection process Consistent with the discussion below under ldquoInvestment Restrictionsrdquo the Fund will not purchase any Floating Rate Debt Instruments (including asset-backed securities and mortgage-backed securities) that in the Adviserrsquos opinion are illiquid if as a result more than 15 of the value of the Fundrsquos net assets will be invested in illiquid assets
18 For the avoidance of doubt if a security is rated by multiple NRSROs and receives different ratings the Fund will treat the security as being rated in the highest rating category received from an NRSRO
19 Comparable quality of unrated securities will be determined by the Adviser based on fundamental credit analysis of the unrated security and comparable NRSRO-rated securities On a best efforts basis the Adviser will attempt to make a rating determination based on publicly available data In making a ldquocomparable qualityrdquo determination the Adviser may consider for example whether the issuer of the security has issued other rated securities the nature and provisions of the relevant security whether the obligations under the relevant security are guaranteed by another entity and the rating of such guarantor (if any) relevant cash flows macroeconomic analysis andor sector or industry analysis
SR-NASDAQ-2015-011 Amendment No 2 Page 41 of 64
Adviser to be of comparable quality) commonly referred to as ldquohigh yieldrdquo or ldquojunkrdquo
bonds If subsequent to purchase by the Fund a security held by the Fund experiences a
decline in credit quality and falls below investment grade the Fund may continue to hold
the security and it will not cause the Fund to violate the 35 investment limitation
however the security will be taken into account for purposes of determining whether
purchases of additional securities will cause the Fund to violate such limitation
The Fund will limit its investments in asset-backed securities (excluding agency
mortgage-backed securities) and non-agency mortgage-backed securities (in the
aggregate) to 20 of its net assets20 In addition the Fund will limit its investments in
junior loans to 20 of its net assets
The Fund will hold debt securities (including in the aggregate Floating Rate
Debt Instruments and the fixed-rate debt securities described below) of at least 13
non-affiliated issuers
Other Investments
Under normal market conditions the Fund will invest primarily in the Floating
Rate Debt Instruments described above to meet its investment objective In addition the
Fund may invest up to 20 of its net assets in the following types of fixed-rate debt
securities corporate21 and government bonds and notes agency securities22 instruments
20 For the avoidance of doubt there is no limitation on the Fundrsquos investments in agency mortgage-backed securities
21 See footnote 10 above
22 See footnote 11 above
SR-NASDAQ-2015-011 Amendment No 2 Page 42 of 64
of non-US issuers in developed markets privately-issued securities 23 asset-backed
securities 24 mortgage-backed securities 25 municipal bonds money market securities26
and investment companies27 (including investment companies advised by the Adviser)
that invest primarily in the foregoing types of debt securities
Further to pursue its investment objective the Fund may invest up to 20 of the
value of its net assets in exchange-listed options on US Treasury futures contracts and
exchange-listed US Treasury futures contracts28 The use of these derivative
transactions may allow the Fund to obtain net long or short exposures to selected interest
rates These derivatives may also be used to hedge risks including interest rate risks and
credit risks associated with the Fundrsquos portfolio investments The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
23 See footnote 12 above
24 See footnote 13 above
25 See footnote 14 above
26 ldquoMoney market securitiesrdquo for these purposes generally includes short-term high-quality obligations issued or guaranteed by the US Treasury or the agencies or instrumentalities of the US government short-term high-quality securities issued or guaranteed by non-US governments agencies and instrumentalities repurchase agreements commercial paper (both asset-backed and non-assetshybacked) and deposits and other obligations of US and non-US banks and financial institutions
27 See footnote 16 above
28 At least 90 of the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be invested in instruments that trade in markets that are members of the Intermarket Surveillance Group (ldquoISGrdquo) (see footnote 40 below) or are parties to a comprehensive surveillance sharing agreement with the Exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 43 of 64
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index
Investment Restrictions
The Fund will not invest 25 or more of the value of its total assets in securities
of issuers in any one industry This restriction does not apply to (a) obligations issued or
guaranteed by the US government its agencies or instrumentalities or (b) securities of
other investment companies29
The Fund may hold up to an aggregate amount of 15 of its net assets in illiquid
assets (calculated at the time of investment) including Rule 144A securities deemed
illiquid by the Adviser30 The Fund will monitor its portfolio liquidity on an ongoing
basis to determine whether in light of current circumstances an adequate level of
liquidity is being maintained and will consider taking appropriate steps in order to
maintain adequate liquidity if through a change in values net assets or other
circumstances more than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid
assets include securities subject to contractual or other restrictions on resale and other
29 See Form N-1A Item 9 The Commission has taken the position that a fund is concentrated if it invests more than 25 of the value of its total assets in any one industry See eg Investment Company Act Release No 9011 (October 30 1975) 40 FR 54241 (November 21 1975)
30 In reaching liquidity decisions the Adviser may consider the following factors the frequency of trades and quotes for the security the number of dealers wishing to purchase or sell the security and the number of other potential purchasers dealer undertakings to make a market in the security and the nature of the security and the nature of the marketplace in which it trades (eg the time needed to dispose of the security the method of soliciting offers and the mechanics of transfer)
SR-NASDAQ-2015-011 Amendment No 2 Page 44 of 64
instruments that lack readily available markets as determined in accordance with
Commission staff guidance31
The Fund will not invest in non-US equity securities
Creation and Redemption of Shares
The Fund will issue and redeem Shares on a continuous basis at net asset value
(ldquoNAVrdquo)32 only in large blocks of Shares (ldquoCreation Unitsrdquo) in transactions with
authorized participants generally including broker-dealers and large institutional
investors (ldquoAuthorized Participantsrdquo) Creation Units generally will consist of 50000
Shares although this may change from time to time Creation Units however are not
expected to consist of less than 50000 Shares As described in the Registration
Statement and consistent with the Exemptive Relief the Fund will issue and redeem
Creation Units in exchange for an in-kind portfolio of instruments andor cash in lieu of
31 The Commission has stated that long-standing Commission guidelines have required open-end funds to hold no more than 15 of their net assets in illiquid securities and other illiquid assets See Investment Company Act Release No 28193 (March 11 2008) 73 FR 14618 (March 18 2008) footnote 34 See also Investment Company Act Release No 5847 (October 21 1969) 35 FR 19989 (December 31 1970) (Statement Regarding ldquoRestricted Securitiesrdquo) Investment Company Act Release No 18612 (March 12 1992) 57 FR 9828 (March 20 1992) (Revisions of Guidelines to Form N-1A) A fundrsquos portfolio security is illiquid if it cannot be disposed of in the ordinary course of business within seven days at approximately the value ascribed to it by the fund See Investment Company Act Release No 14983 (March 12 1986) 51 FR 9773 (March 21 1986) (adopting amendments to Rule 2a-7 under the 1940 Act) Investment Company Act Release No 17452 (April 23 1990) 55 FR 17933 (April 30 1990) (adopting Rule 144A under the Securities Act of 1933)
32 The NAV of the Fundrsquos Shares generally will be calculated once daily Monday through Friday as of the close of regular trading on the New York Stock Exchange generally 400 pm Eastern Time (the ldquoNAV Calculation Timerdquo) NAV per Share will be calculated by dividing the Fundrsquos net assets by the number of Fund Shares outstanding For more information regarding the valuation of Fund investments in calculating the Fundrsquos NAV see the Registration Statement
SR-NASDAQ-2015-011 Amendment No 2 Page 45 of 64
such instruments (the ldquoCreation Basketrdquo) In addition if there is a difference between the
NAV attributable to a Creation Unit and the market value of the Creation Basket
exchanged for the Creation Unit the party conveying instruments with the lower value
will pay to the other an amount in cash equal to the difference (referred to as the ldquoCash
Componentrdquo)
Creations and redemptions must be made by or through an Authorized Participant
that has executed an agreement that has been agreed to by the Distributor and BNY with
respect to creations and redemptions of Creation Units All standard orders to create
Creation Units must be received by the transfer agent no later than the closing time of the
regular trading session on the New York Stock Exchange (ordinarily 400 pm Eastern
Time) (the ldquoClosing Timerdquo) in each case on the date such order is placed in order for the
creation of Creation Units to be effected based on the NAV of Shares as next determined
on such date after receipt of the order in proper form Shares may be redeemed only in
Creation Units at their NAV next determined after receipt not later than the Closing Time
of a redemption request in proper form by the Fund through the transfer agent and only
on a business day
The Fundrsquos custodian through the National Securities Clearing Corporation will
make available on each business day prior to the opening of business of the Exchange
the list of the names and quantities of the instruments comprising the Creation Basket as
well as the estimated Cash Component (if any) for that day The published Creation
Basket will apply until a new Creation Basket is announced on the following business
day prior to commencement of trading in the Shares
SR-NASDAQ-2015-011 Amendment No 2 Page 46 of 64
Net Asset Value
The Fundrsquos NAV will be determined as of the close of trading (normally
400 pm Eastern Time) on each day the New York Stock Exchange is open for
business NAV will be calculated for the Fund by taking the market price of the Fundrsquos
total assets including interest or dividends accrued but not yet collected less all
liabilities and dividing such amount by the total number of Shares outstanding The
result rounded to the nearest cent will be the NAV per Share All valuations will be
subject to review by the Board of Trustees of the Trust (ldquoTrust Boardrdquo) or its delegate
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with valuation procedures (which may be revised from time to time) adopted by the Trust
Board (the ldquoValuation Proceduresrdquo) and in accordance with the 1940 Act A market
valuation generally means a valuation (i) obtained from an exchange an independent
pricing service (ldquoPricing Servicerdquo) or a major market maker (or dealer) or (ii) based on a
price quotation or other equivalent indication of value supplied by an exchange a Pricing
Service or a major market maker (or dealer) The information summarized below is
based on the Valuation Procedures as currently in effect however as noted above the
Valuation Procedures are amended from time to time and therefore such information is
subject to change
Certain securities including Floating Rate Debt Instruments in which the Fund
may invest will not be listed on any securities exchange or board of trade Such
securities will typically be bought and sold by institutional investors in individually
negotiated private transactions that function in many respects like an over-the-counter
SR-NASDAQ-2015-011 Amendment No 2 Page 47 of 64
secondary market although typically no formal market makers will exist Certain
securities particularly debt securities will have few or no trades or trade infrequently
and information regarding a specific security may not be widely available or may be
incomplete Accordingly determinations of the fair value of debt securities may be
based on infrequent and dated information Because there is less reliable objective data
available elements of judgment may play a greater role in valuation of debt securities
than for other types of securities Typically Floating Rate Debt Instruments and other
debt securities in which the Fund may invest (other than those described below) will be
valued using information provided by a Pricing Service Debt securities having a
remaining maturity of 60 days or less when purchased will be valued at cost adjusted for
amortization of premiums and accretion of discounts provided the Adviserrsquos pricing
committee (the ldquoPricing Committeerdquo) has determined that the use of amortized cost is an
appropriate reflection of fair value given market and issuer-specific conditions existing at
the time of the determination Overnight repurchase agreements will be valued at cost
and term repurchase agreements (ie those whose maturity exceeds seven days) will be
valued at the average of the bid quotations obtained daily from at least two recognized
dealers
Asset-backed and mortgage-backed securities will generally be valued by using a
Pricing Service If a Pricing Service does not cover a particular asset-backed or
mortgage-backed security or discontinues covering a particular asset-backed or
mortgage-backed security the security will be priced using broker quotes generally
provided by brokers that make or participate in markets in the security To derive values
Pricing Services and broker-dealers may use matrix pricing and valuation models as well
SR-NASDAQ-2015-011 Amendment No 2 Page 48 of 64
as recent market transactions for the same or similar assets As it deems appropriate the
Pricing Committee may determine that a Pricing Service price does not represent an
accurate value of an asset-backed or mortgage-backed security based on broker quotes it
receives a recent trade in the security by the Fund information from a portfolio manager
or other market information In the event that the Pricing Committee determines that the
Pricing Service price is unreliable or inaccurate based on such other information broker
quotes may be used Additionally if the Pricing Committee determines that the price of
an asset-backed or mortgage-backed security obtained from a Pricing Service and
available broker quotes is unreliable or inaccurate due to market conditions or other
reasons or if a Pricing Service price or broker quote is unavailable the security will be
valued using fair value pricing as described below
Equity securities listed on any exchange other than the Exchange will be valued at
the last sale price on the exchange on which they are principally traded on the business
day as of which such value is being determined Equity securities listed on the Exchange
will be valued at the official closing price on the business day as of which such value is
being determined If there has been no sale on such day or no official closing price in
the case of securities traded on the Exchange the securities will be valued using fair
value pricing as described below Equity securities traded on more than one securities
exchange will be valued at the last sale price or official closing price as applicable on
the business day as of which such value is being determined at the close of the exchange
representing the principal market for such securities
Exchange-traded options and futures contracts will be valued at the closing price
in the market where such contracts are principally traded
SR-NASDAQ-2015-011 Amendment No 2 Page 49 of 64
Certain securities including Floating Rate Debt Instruments in which the Fund
will invest will not be able to be priced by pre-established pricing methods Such
securities may be valued by the Trust Board or its delegate at fair value The use of fair
value pricing by the Fund will be governed by the Valuation Procedures and conducted in
accordance with the provisions of the 1940 Act Valuing the Fundrsquos securities using fair
value pricing will result in using prices for those securities that may differ from current
market valuations or official closing prices on the applicable exchange
Availability of Information
The Fundrsquos website (wwwftportfolioscom) which will be publicly available
prior to the public offering of Shares will include a form of the prospectus for the Fund
that may be downloaded The website will include the Sharesrsquo ticker CUSIP and
exchange information along with additional quantitative information updated on a daily
basis including for the Fund (1) daily trading volume the prior business dayrsquos reported
NAV and closing price mid-point of the bidask spread at the time of calculation of such
NAV (the ldquoBidAsk Pricerdquo)33 and a calculation of the premium and discount of the
BidAsk Price against the NAV and (2) data in chart format displaying the frequency
distribution of discounts and premiums of the daily BidAsk Price against the NAV
within appropriate ranges for each of the four previous calendar quarters On each
business day before commencement of trading in Shares in the Regular Market Session34
33 The BidAsk Price of the Fund will be determined using the mid-point of the highest bid and the lowest offer on the Exchange as of the time of calculation of the Fundrsquos NAV The records relating to BidAsk Prices will be retained by the Fund and its service providers
34 See Nasdaq Rule 4120(b)(4) (describing the three trading sessions on the Exchange (1) Pre-Market Session from 4 am to 930 am Eastern Time (2)
SR-NASDAQ-2015-011 Amendment No 2 Page 50 of 64
on the Exchange the Fund will disclose on its website the identities and quantities of the
portfolio of securities and other assets (the ldquoDisclosed Portfoliordquo as defined in Nasdaq
Rule 5735(c)(2)) held by the Fund that will form the basis for the Fundrsquos calculation of
NAV at the end of the business day 35 The Fundrsquos disclosure of derivative positions in
the Disclosed Portfolio will include information that market participants can use to value
these positions intraday On a daily basis the Fund will disclose on the Fundrsquos website
the following information regarding each portfolio holding as applicable to the type of
holding ticker symbol CUSIP number or other identifier if any a description of the
holding (including the type of holding) the identity of the security or other asset or
instrument underlying the holding if any for options the option strike price quantity
held (as measured by for example par value notional value or number of shares
contracts or units) maturity date if any coupon rate if any effective date if any market
value of the holding and percentage weighting of the holding in the Fundrsquos portfolio
The website information will be publicly available at no charge
In addition for the Fund an estimated value defined in Rule 5735(c)(3) as the
ldquoIntraday Indicative Valuerdquo that reflects an estimated intraday value of the Fundrsquos
Disclosed Portfolio will be disseminated Moreover the Intraday Indicative Value
Regular Market Session from 930 am to 4 pm or 415 pm Eastern Time and (3) Post-Market Session from 4 pm or 415 pm to 8 pm Eastern Time)
Under accounting procedures to be followed by the Fund trades made on the prior business day (ldquoTrdquo) will be booked and reflected in NAV on the current business day (ldquoT+1rdquo) Accordingly the Fund will be able to disclose at the beginning of the business day the portfolio that will form the basis for the NAV calculation at the end of the business day
35
SR-NASDAQ-2015-011 Amendment No 2 Page 51 of 64
available on the NASDAQ OMX Information LLC proprietary index data service36 will
be based upon the current value for the components of the Disclosed Portfolio and will be
updated and widely disseminated by one or more major market data vendors and broadly
displayed at least every 15 seconds during the Regular Market Session The Intraday
Indicative Value will be based on quotes and closing prices from the securitiesrsquo local
market and may not reflect events that occur subsequent to the local marketrsquos close
Premiums and discounts between the Intraday Indicative Value and the market price may
occur This should not be viewed as a ldquoreal timerdquo update of the NAV per Share of the
Fund which is calculated only once a day
The dissemination of the Intraday Indicative Value together with the Disclosed
Portfolio will allow investors to determine the value of the underlying portfolio of the
Fund on a daily basis and will provide a close estimate of that value throughout the
trading day
Investors will also be able to obtain the Fundrsquos Statement of Additional
Information (ldquoSAIrdquo) the Fundrsquos annual and semi-annual reports (together ldquoShareholder
Reportsrdquo) and its Form N-CSR and Form N-SAR filed twice a year The Fundrsquos SAI
and Shareholder Reports will be available free upon request from the Fund and those
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or
downloaded from the Commissionrsquos website at wwwsecgov Information regarding
Currently the NASDAQ OMX Global Index Data Service (ldquoGIDSrdquo) is the NASDAQ OMX global index data feed service offering real-time updates daily summary messages and access to widely followed indexes and Intraday Indicative Values for ETFs GIDS provides investment professionals with the daily information needed to track or trade NASDAQ OMX indexes listed ETFs or third-party partner indexes and ETFs
36
SR-NASDAQ-2015-011 Amendment No 2 Page 52 of 64
market price and trading volume of the Shares will be continually available on a real-time
basis throughout the day on brokersrsquo computer screens and other electronic services
Information regarding the previous dayrsquos closing price and trading volume information
for the Shares will be published daily in the financial section of newspapers Quotation
and last sale information for the Shares will be available via Nasdaq proprietary quote
and trade services as well as in accordance with the Unlisted Trading Privileges and the
Consolidated Tape Association (ldquoCTArdquo) plans for the Shares Quotation and last sale
information for the other ETFs in which the Fund will invest will be available via the
quote and trade services of their respective primary exchanges as well as in accordance
with the Unlisted Trading Privileges and the CTA plans as applicable Quotation and
last sale information for US exchange-traded options will be available via the Options
Price Reporting Authority Intraday executable price quotations on Floating Rate Debt
Instruments and other assets not traded on an exchange will be available from major
broker-dealer firms or market data vendors as well as from automated quotation systems
published or other public sources or online information services Additionally the Trade
Reporting and Compliance Engine (ldquoTRACErdquo) of the Financial Industry Regulatory
Authority (ldquoFINRArdquo) will be a source of price information for corporate bonds
privately-issued securities mortgage-backed securities and asset-backed securities to the
extent transactions in such securities are reported to TRACE37 For exchange-traded
Broker-dealers that are FINRA member firms have an obligation to report transactions in specified debt securities to TRACE to the extent required under applicable FINRA rules Generally such debt securities will have at issuance a maturity that exceeds one calendar year
37
SR-NASDAQ-2015-011 Amendment No 2 Page 53 of 64
assets intraday pricing information will be available directly from the applicable listing
exchange
Additional information regarding the Fund and the Shares including investment
strategies risks creation and redemption procedures fees Fund holdings disclosure
policies distributions and taxes will be included in the Registration Statement
Initial and Continued Listing
The Shares will be subject to Rule 5735 which sets forth the initial and continued
listing criteria applicable to Managed Fund Shares The Exchange represents that for
initial andor continued listing the Fund must be in compliance with Rule 10A-338 under
the Act A minimum of 100000 Shares will be outstanding at the commencement of
trading on the Exchange The Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the NAV and the
Disclosed Portfolio will be made available to all market participants at the same time
Trading Halts
With respect to trading halts the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading in the Shares of the Fund Nasdaq will
halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12) Trading may be
halted because of market conditions or for reasons that in the view of the Exchange
make trading in the Shares inadvisable These may include (1) the extent to which
trading is not occurring in the securities andor the other assets constituting the Disclosed
Portfolio of the Fund or (2) whether other unusual conditions or circumstances
See 17 CFR 24010A-3 38
SR-NASDAQ-2015-011 Amendment No 2 Page 54 of 64
detrimental to the maintenance of a fair and orderly market are present Trading in the
Shares also will be subject to Rule 5735(d)(2)(D) which sets forth circumstances under
which Shares of the Fund may be halted
Trading Rules
Nasdaq deems the Shares to be equity securities thus rendering trading in the
Shares subject to Nasdaqrsquos existing rules governing the trading of equity securities
Nasdaq will allow trading in the Shares from 400 am until 800 pm Eastern Time
The Exchange has appropriate rules to facilitate transactions in the Shares during all
trading sessions As provided in Nasdaq Rule 5735(b)(3) the minimum price variation
for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $001
Surveillance
The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws39 The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities laws
The surveillances referred to above generally focus on detecting securities trading
outside their normal patterns which could be indicative of manipulative or other violative
activity When such situations are detected surveillance analysis follows and
FINRA surveils trading on the Exchange pursuant to a regulatory services agreement The Exchange is responsible for FINRArsquos performance under this regulatory services agreement
39
SR-NASDAQ-2015-011 Amendment No 2 Page 55 of 64
investigations are opened where appropriate to review the behavior of all relevant
parties for all relevant trading violations
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 56 of 64
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
SR-NASDAQ-2015-011 Amendment No 2 Page 57 of 64
2 Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
SR-NASDAQ-2015-011 Amendment No 2 Page 58 of 64
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
SR-NASDAQ-2015-011 Amendment No 2 Page 59 of 64
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
SR-NASDAQ-2015-011 Amendment No 2 Page 60 of 64
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 61 of 64
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
SR-NASDAQ-2015-011 Amendment No 2 Page 62 of 64
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
B Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
C Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received From Members Participants or Others
Written comments were neither solicited nor received
III Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Within 45 days of the date of publication of this notice in the Federal Register or
within such longer period (i) as the Commission may designate up to 90 days of such date
if it finds such longer period to be appropriate and publishes its reasons for so finding or
(ii) as to which the Exchange consents the Commission shall (a) by order approve or
disapprove such proposed rule change or (b) institute proceedings to determine whether
the proposed rule change should be disapproved
SR-NASDAQ-2015-011 Amendment No 2 Page 63 of 64
IV Solicitation of Comments
Interested persons are invited to submit written data views and arguments
concerning the foregoing including whether the proposed rule change is consistent with
the Act Comments may be submitted by any of the following methods
Electronic comments
bull Use the Commissionrsquos Internet comment form
(httpwwwsecgovrulessroshtml) or
bull Send an e-mail to rule-commentssecgov Please include File Number
SR-NASDAQ-2015-011 on the subject line
Paper comments
bull Send paper comments in triplicate to Brent J Fields Secretary Securities and
Exchange Commission Station Place 100 F Street NE Washington DC
20549-9303
All submissions should refer to File Number SR-NASDAQ-2015-011 This file number
should be included on the subject line if e-mail is used To help the Commission process
and review your comments more efficiently please use only one method The
Commission will post all comments on the Commissionrsquos Internet website
httpwwwsecgovrulessroshtml
Copies of the submission all subsequent amendments all written statements with
respect to the proposed rule change that are filed with the Commission and all written
communications relating to the proposed rule change between the Commission and any
person other than those that may be withheld from the public in accordance with the
provisions of 5 USC 552 will be available for website viewing and printing in the
Commissionrsquos Public Reference Room 100 F Street NE Washington DC 20549 on
SR-NASDAQ-2015-011 Amendment No 2 Page 64 of 64
official business days between the hours of 1000 am and 300 pm Copies of the filing
also will be available for inspection and copying at the principal office of Nasdaq All
comments received will be posted without change the Commission does not edit
personal identifying information from submissions You should submit only information
that you wish to make available publicly
All submissions should refer to File Number SR-NASDAQ-2015-011 and should
be submitted on or before [insert date 21 days from publication in the Federal Register]
For the Commission by the Division of Trading and Markets pursuant to
delegated authority41
Kevin M OrsquoNeill Deputy Secretary
17 CFR 20030-3(a)(12) 41
7
SR-NASDAQ-2015-011 Amendment No 2 Page 36 of 64
Paragraph (g) of Rule 5735 provides that if the investment adviser to the
investment company issuing Managed Fund Shares is affiliated with a broker-dealer
such investment adviser shall erect a ldquofire wallrdquo between the investment adviser and the
broker-dealer with respect to access to information concerning the composition andor
changes to such investment company portfolio7 In addition paragraph (g) further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio Rule 5735(g) is similar
to Nasdaq Rule 5705(b)(5)(A)(i) however paragraph (g) in connection with the
establishment of a ldquofire wallrdquo between the investment adviser and the broker-dealer
reflects the applicable open-end fundrsquos portfolio not an underlying benchmark index as
is the case with index-based funds The Adviser is not a broker-dealer although it is
affiliated with the Distributor a broker-dealer The Adviser has implemented a fire wall
An investment adviser to an open-end fund is required to be registered under the Investment Advisers Act of 1940 (the ldquoAdvisers Actrdquo) As a result the Adviser and its related personnel are subject to the provisions of Rule 204A-1 under the Advisers Act relating to codes of ethics This Rule requires investment advisers to adopt a code of ethics that reflects the fiduciary nature of the relationship to clients as well as compliance with other applicable securities laws Accordingly procedures designed to prevent the communication and misuse of non-public information by an investment adviser must be consistent with Rule 204A-1 under the Advisers Act In addition Rule 206(4)-7 under the Advisers Act makes it unlawful for an investment adviser to provide investment advice to clients unless such investment adviser has (i) adopted and implemented written policies and procedures reasonably designed to prevent violation by the investment adviser and its supervised persons of the Advisers Act and the Commission rules adopted thereunder (ii) implemented at a minimum an annual review regarding the adequacy of the policies and procedures established pursuant to subparagraph (i) above and the effectiveness of their implementation and (iii) designated an individual (who is a supervised person) responsible for administering the policies and procedures adopted under subparagraph (i) above
8
SR-NASDAQ-2015-011 Amendment No 2 Page 37 of 64
with respect to its broker-dealer affiliate regarding access to information concerning the
composition andor changes to the portfolio In addition personnel who make decisions
on the Fundrsquos portfolio composition will be subject to procedures designed to prevent the
use and dissemination of material non-public information regarding the Fundrsquos portfolio
In the event (a) the Adviser becomes or becomes newly affiliated with a broker-dealer
or (b) any new adviser or sub-adviser is a registered broker-dealer or becomes affiliated
with another broker-dealer it will implement a fire wall with respect to its relevant
personnel andor such broker-dealer affiliate as applicable regarding access to
information concerning the composition andor changes to the portfolio and will be
subject to procedures designed to prevent the use and dissemination of material
non-public information regarding such portfolio The Fund does not currently intend to
use a sub-adviser
First Trust Strategic Floating Rate ETF
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions8 at least 80 of its
The term ldquounder normal market conditionsrdquo as used herein includes but is not limited to the absence of adverse market economic political or other conditions including extreme volatility or trading halts in the fixed income markets or the financial markets generally operational issues causing dissemination of inaccurate market information or force majeure type events such as systems failure natural or man-made disaster act of God armed conflict act of terrorism riot or labor disruption or any similar intervening circumstance For temporary defensive purposes during the initial invest-up period and during periods of high cash inflows or outflows the Fund may depart from its principal investment strategies for example it may hold a higher than normal proportion of its assets in cash During such periods the Fund may not be able to achieve its investment objective The Fund may adopt a defensive strategy when the Adviser believes securities in which the Fund normally invests have elevated risks due to political or economic factors and in other extraordinary circumstances
SR-NASDAQ-2015-011 Amendment No 2 Page 38 of 64
net assets in a portfolio of the following types of floating-rate9 debt instruments issued by
US and non-US public- and private-sector entities floating-rate corporate10 and
government bonds and notes floating-rate agency securities 11 floating-rate instruments
of non-US issuers floating-rate privately-issued securities 12 floating-rate asset-backed
securities 13 floating-rate mortgage-backed securities14 floating-rate loans 15 and
9 For the avoidance of doubt the term ldquofloating-raterdquo shall also include similar terms such as ldquovariable-raterdquo and ldquoadjustable-raterdquo
10 The Adviser expects that under normal market conditions generally for a corporate bond to be considered as an eligible investment after taking into account such an investment at least 75 of the Fundrsquos net assets that are invested in floating-rate corporate bonds and as described below fixed-rate corporate bonds (in the aggregate) will be comprised of corporate bonds that have at the time of original issuance $100 million or more par amount outstanding
11 ldquoAgency securitiesrdquo for these purposes generally includes securities issued by the following entities Government National Mortgage Association (Ginnie Mae) Federal National Mortgage Association (Fannie Mae) Federal Home Loan Banks (FHLBanks) Federal Home Loan Mortgage Corporation (Freddie Mac) Farm Credit System (FCS) Farm Credit Banks (FCBanks) Student Loan Marketing Association (Sallie Mae) Resolution Funding Corporation (REFCORP) Financing Corporation (FICO) and the Farm Credit System (FCS) Financial Assistance Corporation (FAC) Agency securities can include but are not limited to mortgage-backed securities
12 ldquoPrivately-issued securitiesrdquo for these purposes generally includes Rule 144A securities other than mortgage-backed Rule 144A securities Under normal market conditions privately-issued securities will have at the time of original issuance $100 million or more principal amount outstanding to be considered eligible investments
13 Asset-backed securities are securities that are backed by a pool of assets The Fund currently intends to invest in asset-backed securities that are consumer asset-backed securities
14 Mortgage-backed securities which are securities that directly or indirectly represent a participation in or are secured by and payable from mortgage loans on real property will consist of (1) residential mortgage-backed securities (ldquoRMBSrdquo) (2) commercial mortgage-backed securities (ldquoCMBSrdquo) (3) stripped mortgage-backed securities (ldquoSMBSrdquo) which are mortgage-backed securities
SR-NASDAQ-2015-011 Amendment No 2 Page 39 of 64
investment companies16 (including investment companies advised by the Adviser) that
invest primarily in the foregoing types of debt instruments17 (collectively ldquoFloating Rate
Debt Instrumentsrdquo)
where mortgage payments are divided between paying the loanrsquos principal and paying the loanrsquos interest (4) collateralized mortgage obligations (ldquoCMOsrdquo) and real estate mortgage investment conduits (ldquoREMICsrdquo) which are mortgage-backed securities that are divided into multiple classes with each class being entitled to a different share of the principal and interest payments received from the pool of underlying assets
15 The floating-rate loans in which the Fund will invest will represent amounts borrowed by companies or other entities from banks and other lenders and a significant portion of such floating-rate loans may be rated below investment grade or unrated Floating-rate loans held by the Fund may be senior or subordinate obligations of the borrower and may or may not be secured by collateral First lien senior secured floating-rate loans are referred to herein as ldquosenior loansrdquo Floating-rate loans that are not senior loans (ie unsecured floating-rate loans and secured floating-rate loans that are not first lien floating-rate loans) are referred to herein as ldquojunior loansrdquo The Fund will generally invest in floating-rate loans that the Adviser deems to be liquid with readily available prices notwithstanding the foregoing the Fund may invest in floating-rate loans that are deemed illiquid so long as the Fund complies with the 15 limitation on investments of its net assets in illiquid assets described below under ldquoInvestment Restrictionsrdquo
16 The Fund currently anticipates investing only in registered open-end investment companies that are listed and traded in the US on registered exchanges (ie other ETFs) An ETF is an investment company registered under the 1940 Act that holds a portfolio of securities Many ETFs are designed to track the performance of a securities index including industry sector country and region indexes The Fund may invest in the securities of ETFs in excess of the limits imposed under the 1940 Act pursuant to exemptive orders obtained by other ETFs and their sponsors from the Commission In addition the Fund may invest in the securities of certain investment companies in excess of the limits imposed under the 1940 Act pursuant to an exemptive order obtained by the Trust and the Adviser from the Commission See Investment Company Act Release No 30377 (February 5 2013) (File No 812-13895) The ETFs in which the Fund may invest include Index Fund Shares (as described in Nasdaq Rule 5705) Portfolio Depository Receipts (as described in Nasdaq Rule 5705) and Managed Fund Shares (as described in Nasdaq Rule 5735) While the Fund may invest in inverse ETFs the Fund will not invest in leveraged or inverse leveraged (eg 2X or -3X) ETFs
SR-NASDAQ-2015-011 Amendment No 2 Page 40 of 64
At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade To be considered
ldquoinvestment graderdquo under normal market conditions rated Floating Rate Debt
Instruments will carry at the time of purchase a rating in the highest four rating
categories of at least one nationally recognized statistical ratings organization
(ldquoNRSROrdquo) (eg BBB- or higher by Standard amp Poorrsquos Ratings Services (ldquoSampPrdquo)
andor Fitch Ratings (ldquoFitchrdquo) or Baa3 or higher by Moodyrsquos Investors Service Inc
(ldquoMoodyrsquosrdquo)18 For unrated securities to be considered ldquoinvestment graderdquo under normal
market conditions such securities will be determined at the time of purchase to be of
comparable quality19 by the Adviser The Fund may invest up to 35 of its net assets in
securities that are at the time of investment rated below investment grade by each
NRSRO rating such securities (or securities that are unrated and determined by the
17 The liquidity of a security especially in the case of asset-backed and mortgage-backed securities will be a substantial factor in the Fundrsquos security selection process Consistent with the discussion below under ldquoInvestment Restrictionsrdquo the Fund will not purchase any Floating Rate Debt Instruments (including asset-backed securities and mortgage-backed securities) that in the Adviserrsquos opinion are illiquid if as a result more than 15 of the value of the Fundrsquos net assets will be invested in illiquid assets
18 For the avoidance of doubt if a security is rated by multiple NRSROs and receives different ratings the Fund will treat the security as being rated in the highest rating category received from an NRSRO
19 Comparable quality of unrated securities will be determined by the Adviser based on fundamental credit analysis of the unrated security and comparable NRSRO-rated securities On a best efforts basis the Adviser will attempt to make a rating determination based on publicly available data In making a ldquocomparable qualityrdquo determination the Adviser may consider for example whether the issuer of the security has issued other rated securities the nature and provisions of the relevant security whether the obligations under the relevant security are guaranteed by another entity and the rating of such guarantor (if any) relevant cash flows macroeconomic analysis andor sector or industry analysis
SR-NASDAQ-2015-011 Amendment No 2 Page 41 of 64
Adviser to be of comparable quality) commonly referred to as ldquohigh yieldrdquo or ldquojunkrdquo
bonds If subsequent to purchase by the Fund a security held by the Fund experiences a
decline in credit quality and falls below investment grade the Fund may continue to hold
the security and it will not cause the Fund to violate the 35 investment limitation
however the security will be taken into account for purposes of determining whether
purchases of additional securities will cause the Fund to violate such limitation
The Fund will limit its investments in asset-backed securities (excluding agency
mortgage-backed securities) and non-agency mortgage-backed securities (in the
aggregate) to 20 of its net assets20 In addition the Fund will limit its investments in
junior loans to 20 of its net assets
The Fund will hold debt securities (including in the aggregate Floating Rate
Debt Instruments and the fixed-rate debt securities described below) of at least 13
non-affiliated issuers
Other Investments
Under normal market conditions the Fund will invest primarily in the Floating
Rate Debt Instruments described above to meet its investment objective In addition the
Fund may invest up to 20 of its net assets in the following types of fixed-rate debt
securities corporate21 and government bonds and notes agency securities22 instruments
20 For the avoidance of doubt there is no limitation on the Fundrsquos investments in agency mortgage-backed securities
21 See footnote 10 above
22 See footnote 11 above
SR-NASDAQ-2015-011 Amendment No 2 Page 42 of 64
of non-US issuers in developed markets privately-issued securities 23 asset-backed
securities 24 mortgage-backed securities 25 municipal bonds money market securities26
and investment companies27 (including investment companies advised by the Adviser)
that invest primarily in the foregoing types of debt securities
Further to pursue its investment objective the Fund may invest up to 20 of the
value of its net assets in exchange-listed options on US Treasury futures contracts and
exchange-listed US Treasury futures contracts28 The use of these derivative
transactions may allow the Fund to obtain net long or short exposures to selected interest
rates These derivatives may also be used to hedge risks including interest rate risks and
credit risks associated with the Fundrsquos portfolio investments The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
23 See footnote 12 above
24 See footnote 13 above
25 See footnote 14 above
26 ldquoMoney market securitiesrdquo for these purposes generally includes short-term high-quality obligations issued or guaranteed by the US Treasury or the agencies or instrumentalities of the US government short-term high-quality securities issued or guaranteed by non-US governments agencies and instrumentalities repurchase agreements commercial paper (both asset-backed and non-assetshybacked) and deposits and other obligations of US and non-US banks and financial institutions
27 See footnote 16 above
28 At least 90 of the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be invested in instruments that trade in markets that are members of the Intermarket Surveillance Group (ldquoISGrdquo) (see footnote 40 below) or are parties to a comprehensive surveillance sharing agreement with the Exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 43 of 64
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index
Investment Restrictions
The Fund will not invest 25 or more of the value of its total assets in securities
of issuers in any one industry This restriction does not apply to (a) obligations issued or
guaranteed by the US government its agencies or instrumentalities or (b) securities of
other investment companies29
The Fund may hold up to an aggregate amount of 15 of its net assets in illiquid
assets (calculated at the time of investment) including Rule 144A securities deemed
illiquid by the Adviser30 The Fund will monitor its portfolio liquidity on an ongoing
basis to determine whether in light of current circumstances an adequate level of
liquidity is being maintained and will consider taking appropriate steps in order to
maintain adequate liquidity if through a change in values net assets or other
circumstances more than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid
assets include securities subject to contractual or other restrictions on resale and other
29 See Form N-1A Item 9 The Commission has taken the position that a fund is concentrated if it invests more than 25 of the value of its total assets in any one industry See eg Investment Company Act Release No 9011 (October 30 1975) 40 FR 54241 (November 21 1975)
30 In reaching liquidity decisions the Adviser may consider the following factors the frequency of trades and quotes for the security the number of dealers wishing to purchase or sell the security and the number of other potential purchasers dealer undertakings to make a market in the security and the nature of the security and the nature of the marketplace in which it trades (eg the time needed to dispose of the security the method of soliciting offers and the mechanics of transfer)
SR-NASDAQ-2015-011 Amendment No 2 Page 44 of 64
instruments that lack readily available markets as determined in accordance with
Commission staff guidance31
The Fund will not invest in non-US equity securities
Creation and Redemption of Shares
The Fund will issue and redeem Shares on a continuous basis at net asset value
(ldquoNAVrdquo)32 only in large blocks of Shares (ldquoCreation Unitsrdquo) in transactions with
authorized participants generally including broker-dealers and large institutional
investors (ldquoAuthorized Participantsrdquo) Creation Units generally will consist of 50000
Shares although this may change from time to time Creation Units however are not
expected to consist of less than 50000 Shares As described in the Registration
Statement and consistent with the Exemptive Relief the Fund will issue and redeem
Creation Units in exchange for an in-kind portfolio of instruments andor cash in lieu of
31 The Commission has stated that long-standing Commission guidelines have required open-end funds to hold no more than 15 of their net assets in illiquid securities and other illiquid assets See Investment Company Act Release No 28193 (March 11 2008) 73 FR 14618 (March 18 2008) footnote 34 See also Investment Company Act Release No 5847 (October 21 1969) 35 FR 19989 (December 31 1970) (Statement Regarding ldquoRestricted Securitiesrdquo) Investment Company Act Release No 18612 (March 12 1992) 57 FR 9828 (March 20 1992) (Revisions of Guidelines to Form N-1A) A fundrsquos portfolio security is illiquid if it cannot be disposed of in the ordinary course of business within seven days at approximately the value ascribed to it by the fund See Investment Company Act Release No 14983 (March 12 1986) 51 FR 9773 (March 21 1986) (adopting amendments to Rule 2a-7 under the 1940 Act) Investment Company Act Release No 17452 (April 23 1990) 55 FR 17933 (April 30 1990) (adopting Rule 144A under the Securities Act of 1933)
32 The NAV of the Fundrsquos Shares generally will be calculated once daily Monday through Friday as of the close of regular trading on the New York Stock Exchange generally 400 pm Eastern Time (the ldquoNAV Calculation Timerdquo) NAV per Share will be calculated by dividing the Fundrsquos net assets by the number of Fund Shares outstanding For more information regarding the valuation of Fund investments in calculating the Fundrsquos NAV see the Registration Statement
SR-NASDAQ-2015-011 Amendment No 2 Page 45 of 64
such instruments (the ldquoCreation Basketrdquo) In addition if there is a difference between the
NAV attributable to a Creation Unit and the market value of the Creation Basket
exchanged for the Creation Unit the party conveying instruments with the lower value
will pay to the other an amount in cash equal to the difference (referred to as the ldquoCash
Componentrdquo)
Creations and redemptions must be made by or through an Authorized Participant
that has executed an agreement that has been agreed to by the Distributor and BNY with
respect to creations and redemptions of Creation Units All standard orders to create
Creation Units must be received by the transfer agent no later than the closing time of the
regular trading session on the New York Stock Exchange (ordinarily 400 pm Eastern
Time) (the ldquoClosing Timerdquo) in each case on the date such order is placed in order for the
creation of Creation Units to be effected based on the NAV of Shares as next determined
on such date after receipt of the order in proper form Shares may be redeemed only in
Creation Units at their NAV next determined after receipt not later than the Closing Time
of a redemption request in proper form by the Fund through the transfer agent and only
on a business day
The Fundrsquos custodian through the National Securities Clearing Corporation will
make available on each business day prior to the opening of business of the Exchange
the list of the names and quantities of the instruments comprising the Creation Basket as
well as the estimated Cash Component (if any) for that day The published Creation
Basket will apply until a new Creation Basket is announced on the following business
day prior to commencement of trading in the Shares
SR-NASDAQ-2015-011 Amendment No 2 Page 46 of 64
Net Asset Value
The Fundrsquos NAV will be determined as of the close of trading (normally
400 pm Eastern Time) on each day the New York Stock Exchange is open for
business NAV will be calculated for the Fund by taking the market price of the Fundrsquos
total assets including interest or dividends accrued but not yet collected less all
liabilities and dividing such amount by the total number of Shares outstanding The
result rounded to the nearest cent will be the NAV per Share All valuations will be
subject to review by the Board of Trustees of the Trust (ldquoTrust Boardrdquo) or its delegate
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with valuation procedures (which may be revised from time to time) adopted by the Trust
Board (the ldquoValuation Proceduresrdquo) and in accordance with the 1940 Act A market
valuation generally means a valuation (i) obtained from an exchange an independent
pricing service (ldquoPricing Servicerdquo) or a major market maker (or dealer) or (ii) based on a
price quotation or other equivalent indication of value supplied by an exchange a Pricing
Service or a major market maker (or dealer) The information summarized below is
based on the Valuation Procedures as currently in effect however as noted above the
Valuation Procedures are amended from time to time and therefore such information is
subject to change
Certain securities including Floating Rate Debt Instruments in which the Fund
may invest will not be listed on any securities exchange or board of trade Such
securities will typically be bought and sold by institutional investors in individually
negotiated private transactions that function in many respects like an over-the-counter
SR-NASDAQ-2015-011 Amendment No 2 Page 47 of 64
secondary market although typically no formal market makers will exist Certain
securities particularly debt securities will have few or no trades or trade infrequently
and information regarding a specific security may not be widely available or may be
incomplete Accordingly determinations of the fair value of debt securities may be
based on infrequent and dated information Because there is less reliable objective data
available elements of judgment may play a greater role in valuation of debt securities
than for other types of securities Typically Floating Rate Debt Instruments and other
debt securities in which the Fund may invest (other than those described below) will be
valued using information provided by a Pricing Service Debt securities having a
remaining maturity of 60 days or less when purchased will be valued at cost adjusted for
amortization of premiums and accretion of discounts provided the Adviserrsquos pricing
committee (the ldquoPricing Committeerdquo) has determined that the use of amortized cost is an
appropriate reflection of fair value given market and issuer-specific conditions existing at
the time of the determination Overnight repurchase agreements will be valued at cost
and term repurchase agreements (ie those whose maturity exceeds seven days) will be
valued at the average of the bid quotations obtained daily from at least two recognized
dealers
Asset-backed and mortgage-backed securities will generally be valued by using a
Pricing Service If a Pricing Service does not cover a particular asset-backed or
mortgage-backed security or discontinues covering a particular asset-backed or
mortgage-backed security the security will be priced using broker quotes generally
provided by brokers that make or participate in markets in the security To derive values
Pricing Services and broker-dealers may use matrix pricing and valuation models as well
SR-NASDAQ-2015-011 Amendment No 2 Page 48 of 64
as recent market transactions for the same or similar assets As it deems appropriate the
Pricing Committee may determine that a Pricing Service price does not represent an
accurate value of an asset-backed or mortgage-backed security based on broker quotes it
receives a recent trade in the security by the Fund information from a portfolio manager
or other market information In the event that the Pricing Committee determines that the
Pricing Service price is unreliable or inaccurate based on such other information broker
quotes may be used Additionally if the Pricing Committee determines that the price of
an asset-backed or mortgage-backed security obtained from a Pricing Service and
available broker quotes is unreliable or inaccurate due to market conditions or other
reasons or if a Pricing Service price or broker quote is unavailable the security will be
valued using fair value pricing as described below
Equity securities listed on any exchange other than the Exchange will be valued at
the last sale price on the exchange on which they are principally traded on the business
day as of which such value is being determined Equity securities listed on the Exchange
will be valued at the official closing price on the business day as of which such value is
being determined If there has been no sale on such day or no official closing price in
the case of securities traded on the Exchange the securities will be valued using fair
value pricing as described below Equity securities traded on more than one securities
exchange will be valued at the last sale price or official closing price as applicable on
the business day as of which such value is being determined at the close of the exchange
representing the principal market for such securities
Exchange-traded options and futures contracts will be valued at the closing price
in the market where such contracts are principally traded
SR-NASDAQ-2015-011 Amendment No 2 Page 49 of 64
Certain securities including Floating Rate Debt Instruments in which the Fund
will invest will not be able to be priced by pre-established pricing methods Such
securities may be valued by the Trust Board or its delegate at fair value The use of fair
value pricing by the Fund will be governed by the Valuation Procedures and conducted in
accordance with the provisions of the 1940 Act Valuing the Fundrsquos securities using fair
value pricing will result in using prices for those securities that may differ from current
market valuations or official closing prices on the applicable exchange
Availability of Information
The Fundrsquos website (wwwftportfolioscom) which will be publicly available
prior to the public offering of Shares will include a form of the prospectus for the Fund
that may be downloaded The website will include the Sharesrsquo ticker CUSIP and
exchange information along with additional quantitative information updated on a daily
basis including for the Fund (1) daily trading volume the prior business dayrsquos reported
NAV and closing price mid-point of the bidask spread at the time of calculation of such
NAV (the ldquoBidAsk Pricerdquo)33 and a calculation of the premium and discount of the
BidAsk Price against the NAV and (2) data in chart format displaying the frequency
distribution of discounts and premiums of the daily BidAsk Price against the NAV
within appropriate ranges for each of the four previous calendar quarters On each
business day before commencement of trading in Shares in the Regular Market Session34
33 The BidAsk Price of the Fund will be determined using the mid-point of the highest bid and the lowest offer on the Exchange as of the time of calculation of the Fundrsquos NAV The records relating to BidAsk Prices will be retained by the Fund and its service providers
34 See Nasdaq Rule 4120(b)(4) (describing the three trading sessions on the Exchange (1) Pre-Market Session from 4 am to 930 am Eastern Time (2)
SR-NASDAQ-2015-011 Amendment No 2 Page 50 of 64
on the Exchange the Fund will disclose on its website the identities and quantities of the
portfolio of securities and other assets (the ldquoDisclosed Portfoliordquo as defined in Nasdaq
Rule 5735(c)(2)) held by the Fund that will form the basis for the Fundrsquos calculation of
NAV at the end of the business day 35 The Fundrsquos disclosure of derivative positions in
the Disclosed Portfolio will include information that market participants can use to value
these positions intraday On a daily basis the Fund will disclose on the Fundrsquos website
the following information regarding each portfolio holding as applicable to the type of
holding ticker symbol CUSIP number or other identifier if any a description of the
holding (including the type of holding) the identity of the security or other asset or
instrument underlying the holding if any for options the option strike price quantity
held (as measured by for example par value notional value or number of shares
contracts or units) maturity date if any coupon rate if any effective date if any market
value of the holding and percentage weighting of the holding in the Fundrsquos portfolio
The website information will be publicly available at no charge
In addition for the Fund an estimated value defined in Rule 5735(c)(3) as the
ldquoIntraday Indicative Valuerdquo that reflects an estimated intraday value of the Fundrsquos
Disclosed Portfolio will be disseminated Moreover the Intraday Indicative Value
Regular Market Session from 930 am to 4 pm or 415 pm Eastern Time and (3) Post-Market Session from 4 pm or 415 pm to 8 pm Eastern Time)
Under accounting procedures to be followed by the Fund trades made on the prior business day (ldquoTrdquo) will be booked and reflected in NAV on the current business day (ldquoT+1rdquo) Accordingly the Fund will be able to disclose at the beginning of the business day the portfolio that will form the basis for the NAV calculation at the end of the business day
35
SR-NASDAQ-2015-011 Amendment No 2 Page 51 of 64
available on the NASDAQ OMX Information LLC proprietary index data service36 will
be based upon the current value for the components of the Disclosed Portfolio and will be
updated and widely disseminated by one or more major market data vendors and broadly
displayed at least every 15 seconds during the Regular Market Session The Intraday
Indicative Value will be based on quotes and closing prices from the securitiesrsquo local
market and may not reflect events that occur subsequent to the local marketrsquos close
Premiums and discounts between the Intraday Indicative Value and the market price may
occur This should not be viewed as a ldquoreal timerdquo update of the NAV per Share of the
Fund which is calculated only once a day
The dissemination of the Intraday Indicative Value together with the Disclosed
Portfolio will allow investors to determine the value of the underlying portfolio of the
Fund on a daily basis and will provide a close estimate of that value throughout the
trading day
Investors will also be able to obtain the Fundrsquos Statement of Additional
Information (ldquoSAIrdquo) the Fundrsquos annual and semi-annual reports (together ldquoShareholder
Reportsrdquo) and its Form N-CSR and Form N-SAR filed twice a year The Fundrsquos SAI
and Shareholder Reports will be available free upon request from the Fund and those
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or
downloaded from the Commissionrsquos website at wwwsecgov Information regarding
Currently the NASDAQ OMX Global Index Data Service (ldquoGIDSrdquo) is the NASDAQ OMX global index data feed service offering real-time updates daily summary messages and access to widely followed indexes and Intraday Indicative Values for ETFs GIDS provides investment professionals with the daily information needed to track or trade NASDAQ OMX indexes listed ETFs or third-party partner indexes and ETFs
36
SR-NASDAQ-2015-011 Amendment No 2 Page 52 of 64
market price and trading volume of the Shares will be continually available on a real-time
basis throughout the day on brokersrsquo computer screens and other electronic services
Information regarding the previous dayrsquos closing price and trading volume information
for the Shares will be published daily in the financial section of newspapers Quotation
and last sale information for the Shares will be available via Nasdaq proprietary quote
and trade services as well as in accordance with the Unlisted Trading Privileges and the
Consolidated Tape Association (ldquoCTArdquo) plans for the Shares Quotation and last sale
information for the other ETFs in which the Fund will invest will be available via the
quote and trade services of their respective primary exchanges as well as in accordance
with the Unlisted Trading Privileges and the CTA plans as applicable Quotation and
last sale information for US exchange-traded options will be available via the Options
Price Reporting Authority Intraday executable price quotations on Floating Rate Debt
Instruments and other assets not traded on an exchange will be available from major
broker-dealer firms or market data vendors as well as from automated quotation systems
published or other public sources or online information services Additionally the Trade
Reporting and Compliance Engine (ldquoTRACErdquo) of the Financial Industry Regulatory
Authority (ldquoFINRArdquo) will be a source of price information for corporate bonds
privately-issued securities mortgage-backed securities and asset-backed securities to the
extent transactions in such securities are reported to TRACE37 For exchange-traded
Broker-dealers that are FINRA member firms have an obligation to report transactions in specified debt securities to TRACE to the extent required under applicable FINRA rules Generally such debt securities will have at issuance a maturity that exceeds one calendar year
37
SR-NASDAQ-2015-011 Amendment No 2 Page 53 of 64
assets intraday pricing information will be available directly from the applicable listing
exchange
Additional information regarding the Fund and the Shares including investment
strategies risks creation and redemption procedures fees Fund holdings disclosure
policies distributions and taxes will be included in the Registration Statement
Initial and Continued Listing
The Shares will be subject to Rule 5735 which sets forth the initial and continued
listing criteria applicable to Managed Fund Shares The Exchange represents that for
initial andor continued listing the Fund must be in compliance with Rule 10A-338 under
the Act A minimum of 100000 Shares will be outstanding at the commencement of
trading on the Exchange The Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the NAV and the
Disclosed Portfolio will be made available to all market participants at the same time
Trading Halts
With respect to trading halts the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading in the Shares of the Fund Nasdaq will
halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12) Trading may be
halted because of market conditions or for reasons that in the view of the Exchange
make trading in the Shares inadvisable These may include (1) the extent to which
trading is not occurring in the securities andor the other assets constituting the Disclosed
Portfolio of the Fund or (2) whether other unusual conditions or circumstances
See 17 CFR 24010A-3 38
SR-NASDAQ-2015-011 Amendment No 2 Page 54 of 64
detrimental to the maintenance of a fair and orderly market are present Trading in the
Shares also will be subject to Rule 5735(d)(2)(D) which sets forth circumstances under
which Shares of the Fund may be halted
Trading Rules
Nasdaq deems the Shares to be equity securities thus rendering trading in the
Shares subject to Nasdaqrsquos existing rules governing the trading of equity securities
Nasdaq will allow trading in the Shares from 400 am until 800 pm Eastern Time
The Exchange has appropriate rules to facilitate transactions in the Shares during all
trading sessions As provided in Nasdaq Rule 5735(b)(3) the minimum price variation
for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $001
Surveillance
The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws39 The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities laws
The surveillances referred to above generally focus on detecting securities trading
outside their normal patterns which could be indicative of manipulative or other violative
activity When such situations are detected surveillance analysis follows and
FINRA surveils trading on the Exchange pursuant to a regulatory services agreement The Exchange is responsible for FINRArsquos performance under this regulatory services agreement
39
SR-NASDAQ-2015-011 Amendment No 2 Page 55 of 64
investigations are opened where appropriate to review the behavior of all relevant
parties for all relevant trading violations
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 56 of 64
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
SR-NASDAQ-2015-011 Amendment No 2 Page 57 of 64
2 Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
SR-NASDAQ-2015-011 Amendment No 2 Page 58 of 64
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
SR-NASDAQ-2015-011 Amendment No 2 Page 59 of 64
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
SR-NASDAQ-2015-011 Amendment No 2 Page 60 of 64
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 61 of 64
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
SR-NASDAQ-2015-011 Amendment No 2 Page 62 of 64
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
B Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
C Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received From Members Participants or Others
Written comments were neither solicited nor received
III Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Within 45 days of the date of publication of this notice in the Federal Register or
within such longer period (i) as the Commission may designate up to 90 days of such date
if it finds such longer period to be appropriate and publishes its reasons for so finding or
(ii) as to which the Exchange consents the Commission shall (a) by order approve or
disapprove such proposed rule change or (b) institute proceedings to determine whether
the proposed rule change should be disapproved
SR-NASDAQ-2015-011 Amendment No 2 Page 63 of 64
IV Solicitation of Comments
Interested persons are invited to submit written data views and arguments
concerning the foregoing including whether the proposed rule change is consistent with
the Act Comments may be submitted by any of the following methods
Electronic comments
bull Use the Commissionrsquos Internet comment form
(httpwwwsecgovrulessroshtml) or
bull Send an e-mail to rule-commentssecgov Please include File Number
SR-NASDAQ-2015-011 on the subject line
Paper comments
bull Send paper comments in triplicate to Brent J Fields Secretary Securities and
Exchange Commission Station Place 100 F Street NE Washington DC
20549-9303
All submissions should refer to File Number SR-NASDAQ-2015-011 This file number
should be included on the subject line if e-mail is used To help the Commission process
and review your comments more efficiently please use only one method The
Commission will post all comments on the Commissionrsquos Internet website
httpwwwsecgovrulessroshtml
Copies of the submission all subsequent amendments all written statements with
respect to the proposed rule change that are filed with the Commission and all written
communications relating to the proposed rule change between the Commission and any
person other than those that may be withheld from the public in accordance with the
provisions of 5 USC 552 will be available for website viewing and printing in the
Commissionrsquos Public Reference Room 100 F Street NE Washington DC 20549 on
SR-NASDAQ-2015-011 Amendment No 2 Page 64 of 64
official business days between the hours of 1000 am and 300 pm Copies of the filing
also will be available for inspection and copying at the principal office of Nasdaq All
comments received will be posted without change the Commission does not edit
personal identifying information from submissions You should submit only information
that you wish to make available publicly
All submissions should refer to File Number SR-NASDAQ-2015-011 and should
be submitted on or before [insert date 21 days from publication in the Federal Register]
For the Commission by the Division of Trading and Markets pursuant to
delegated authority41
Kevin M OrsquoNeill Deputy Secretary
17 CFR 20030-3(a)(12) 41
8
SR-NASDAQ-2015-011 Amendment No 2 Page 37 of 64
with respect to its broker-dealer affiliate regarding access to information concerning the
composition andor changes to the portfolio In addition personnel who make decisions
on the Fundrsquos portfolio composition will be subject to procedures designed to prevent the
use and dissemination of material non-public information regarding the Fundrsquos portfolio
In the event (a) the Adviser becomes or becomes newly affiliated with a broker-dealer
or (b) any new adviser or sub-adviser is a registered broker-dealer or becomes affiliated
with another broker-dealer it will implement a fire wall with respect to its relevant
personnel andor such broker-dealer affiliate as applicable regarding access to
information concerning the composition andor changes to the portfolio and will be
subject to procedures designed to prevent the use and dissemination of material
non-public information regarding such portfolio The Fund does not currently intend to
use a sub-adviser
First Trust Strategic Floating Rate ETF
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions8 at least 80 of its
The term ldquounder normal market conditionsrdquo as used herein includes but is not limited to the absence of adverse market economic political or other conditions including extreme volatility or trading halts in the fixed income markets or the financial markets generally operational issues causing dissemination of inaccurate market information or force majeure type events such as systems failure natural or man-made disaster act of God armed conflict act of terrorism riot or labor disruption or any similar intervening circumstance For temporary defensive purposes during the initial invest-up period and during periods of high cash inflows or outflows the Fund may depart from its principal investment strategies for example it may hold a higher than normal proportion of its assets in cash During such periods the Fund may not be able to achieve its investment objective The Fund may adopt a defensive strategy when the Adviser believes securities in which the Fund normally invests have elevated risks due to political or economic factors and in other extraordinary circumstances
SR-NASDAQ-2015-011 Amendment No 2 Page 38 of 64
net assets in a portfolio of the following types of floating-rate9 debt instruments issued by
US and non-US public- and private-sector entities floating-rate corporate10 and
government bonds and notes floating-rate agency securities 11 floating-rate instruments
of non-US issuers floating-rate privately-issued securities 12 floating-rate asset-backed
securities 13 floating-rate mortgage-backed securities14 floating-rate loans 15 and
9 For the avoidance of doubt the term ldquofloating-raterdquo shall also include similar terms such as ldquovariable-raterdquo and ldquoadjustable-raterdquo
10 The Adviser expects that under normal market conditions generally for a corporate bond to be considered as an eligible investment after taking into account such an investment at least 75 of the Fundrsquos net assets that are invested in floating-rate corporate bonds and as described below fixed-rate corporate bonds (in the aggregate) will be comprised of corporate bonds that have at the time of original issuance $100 million or more par amount outstanding
11 ldquoAgency securitiesrdquo for these purposes generally includes securities issued by the following entities Government National Mortgage Association (Ginnie Mae) Federal National Mortgage Association (Fannie Mae) Federal Home Loan Banks (FHLBanks) Federal Home Loan Mortgage Corporation (Freddie Mac) Farm Credit System (FCS) Farm Credit Banks (FCBanks) Student Loan Marketing Association (Sallie Mae) Resolution Funding Corporation (REFCORP) Financing Corporation (FICO) and the Farm Credit System (FCS) Financial Assistance Corporation (FAC) Agency securities can include but are not limited to mortgage-backed securities
12 ldquoPrivately-issued securitiesrdquo for these purposes generally includes Rule 144A securities other than mortgage-backed Rule 144A securities Under normal market conditions privately-issued securities will have at the time of original issuance $100 million or more principal amount outstanding to be considered eligible investments
13 Asset-backed securities are securities that are backed by a pool of assets The Fund currently intends to invest in asset-backed securities that are consumer asset-backed securities
14 Mortgage-backed securities which are securities that directly or indirectly represent a participation in or are secured by and payable from mortgage loans on real property will consist of (1) residential mortgage-backed securities (ldquoRMBSrdquo) (2) commercial mortgage-backed securities (ldquoCMBSrdquo) (3) stripped mortgage-backed securities (ldquoSMBSrdquo) which are mortgage-backed securities
SR-NASDAQ-2015-011 Amendment No 2 Page 39 of 64
investment companies16 (including investment companies advised by the Adviser) that
invest primarily in the foregoing types of debt instruments17 (collectively ldquoFloating Rate
Debt Instrumentsrdquo)
where mortgage payments are divided between paying the loanrsquos principal and paying the loanrsquos interest (4) collateralized mortgage obligations (ldquoCMOsrdquo) and real estate mortgage investment conduits (ldquoREMICsrdquo) which are mortgage-backed securities that are divided into multiple classes with each class being entitled to a different share of the principal and interest payments received from the pool of underlying assets
15 The floating-rate loans in which the Fund will invest will represent amounts borrowed by companies or other entities from banks and other lenders and a significant portion of such floating-rate loans may be rated below investment grade or unrated Floating-rate loans held by the Fund may be senior or subordinate obligations of the borrower and may or may not be secured by collateral First lien senior secured floating-rate loans are referred to herein as ldquosenior loansrdquo Floating-rate loans that are not senior loans (ie unsecured floating-rate loans and secured floating-rate loans that are not first lien floating-rate loans) are referred to herein as ldquojunior loansrdquo The Fund will generally invest in floating-rate loans that the Adviser deems to be liquid with readily available prices notwithstanding the foregoing the Fund may invest in floating-rate loans that are deemed illiquid so long as the Fund complies with the 15 limitation on investments of its net assets in illiquid assets described below under ldquoInvestment Restrictionsrdquo
16 The Fund currently anticipates investing only in registered open-end investment companies that are listed and traded in the US on registered exchanges (ie other ETFs) An ETF is an investment company registered under the 1940 Act that holds a portfolio of securities Many ETFs are designed to track the performance of a securities index including industry sector country and region indexes The Fund may invest in the securities of ETFs in excess of the limits imposed under the 1940 Act pursuant to exemptive orders obtained by other ETFs and their sponsors from the Commission In addition the Fund may invest in the securities of certain investment companies in excess of the limits imposed under the 1940 Act pursuant to an exemptive order obtained by the Trust and the Adviser from the Commission See Investment Company Act Release No 30377 (February 5 2013) (File No 812-13895) The ETFs in which the Fund may invest include Index Fund Shares (as described in Nasdaq Rule 5705) Portfolio Depository Receipts (as described in Nasdaq Rule 5705) and Managed Fund Shares (as described in Nasdaq Rule 5735) While the Fund may invest in inverse ETFs the Fund will not invest in leveraged or inverse leveraged (eg 2X or -3X) ETFs
SR-NASDAQ-2015-011 Amendment No 2 Page 40 of 64
At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade To be considered
ldquoinvestment graderdquo under normal market conditions rated Floating Rate Debt
Instruments will carry at the time of purchase a rating in the highest four rating
categories of at least one nationally recognized statistical ratings organization
(ldquoNRSROrdquo) (eg BBB- or higher by Standard amp Poorrsquos Ratings Services (ldquoSampPrdquo)
andor Fitch Ratings (ldquoFitchrdquo) or Baa3 or higher by Moodyrsquos Investors Service Inc
(ldquoMoodyrsquosrdquo)18 For unrated securities to be considered ldquoinvestment graderdquo under normal
market conditions such securities will be determined at the time of purchase to be of
comparable quality19 by the Adviser The Fund may invest up to 35 of its net assets in
securities that are at the time of investment rated below investment grade by each
NRSRO rating such securities (or securities that are unrated and determined by the
17 The liquidity of a security especially in the case of asset-backed and mortgage-backed securities will be a substantial factor in the Fundrsquos security selection process Consistent with the discussion below under ldquoInvestment Restrictionsrdquo the Fund will not purchase any Floating Rate Debt Instruments (including asset-backed securities and mortgage-backed securities) that in the Adviserrsquos opinion are illiquid if as a result more than 15 of the value of the Fundrsquos net assets will be invested in illiquid assets
18 For the avoidance of doubt if a security is rated by multiple NRSROs and receives different ratings the Fund will treat the security as being rated in the highest rating category received from an NRSRO
19 Comparable quality of unrated securities will be determined by the Adviser based on fundamental credit analysis of the unrated security and comparable NRSRO-rated securities On a best efforts basis the Adviser will attempt to make a rating determination based on publicly available data In making a ldquocomparable qualityrdquo determination the Adviser may consider for example whether the issuer of the security has issued other rated securities the nature and provisions of the relevant security whether the obligations under the relevant security are guaranteed by another entity and the rating of such guarantor (if any) relevant cash flows macroeconomic analysis andor sector or industry analysis
SR-NASDAQ-2015-011 Amendment No 2 Page 41 of 64
Adviser to be of comparable quality) commonly referred to as ldquohigh yieldrdquo or ldquojunkrdquo
bonds If subsequent to purchase by the Fund a security held by the Fund experiences a
decline in credit quality and falls below investment grade the Fund may continue to hold
the security and it will not cause the Fund to violate the 35 investment limitation
however the security will be taken into account for purposes of determining whether
purchases of additional securities will cause the Fund to violate such limitation
The Fund will limit its investments in asset-backed securities (excluding agency
mortgage-backed securities) and non-agency mortgage-backed securities (in the
aggregate) to 20 of its net assets20 In addition the Fund will limit its investments in
junior loans to 20 of its net assets
The Fund will hold debt securities (including in the aggregate Floating Rate
Debt Instruments and the fixed-rate debt securities described below) of at least 13
non-affiliated issuers
Other Investments
Under normal market conditions the Fund will invest primarily in the Floating
Rate Debt Instruments described above to meet its investment objective In addition the
Fund may invest up to 20 of its net assets in the following types of fixed-rate debt
securities corporate21 and government bonds and notes agency securities22 instruments
20 For the avoidance of doubt there is no limitation on the Fundrsquos investments in agency mortgage-backed securities
21 See footnote 10 above
22 See footnote 11 above
SR-NASDAQ-2015-011 Amendment No 2 Page 42 of 64
of non-US issuers in developed markets privately-issued securities 23 asset-backed
securities 24 mortgage-backed securities 25 municipal bonds money market securities26
and investment companies27 (including investment companies advised by the Adviser)
that invest primarily in the foregoing types of debt securities
Further to pursue its investment objective the Fund may invest up to 20 of the
value of its net assets in exchange-listed options on US Treasury futures contracts and
exchange-listed US Treasury futures contracts28 The use of these derivative
transactions may allow the Fund to obtain net long or short exposures to selected interest
rates These derivatives may also be used to hedge risks including interest rate risks and
credit risks associated with the Fundrsquos portfolio investments The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
23 See footnote 12 above
24 See footnote 13 above
25 See footnote 14 above
26 ldquoMoney market securitiesrdquo for these purposes generally includes short-term high-quality obligations issued or guaranteed by the US Treasury or the agencies or instrumentalities of the US government short-term high-quality securities issued or guaranteed by non-US governments agencies and instrumentalities repurchase agreements commercial paper (both asset-backed and non-assetshybacked) and deposits and other obligations of US and non-US banks and financial institutions
27 See footnote 16 above
28 At least 90 of the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be invested in instruments that trade in markets that are members of the Intermarket Surveillance Group (ldquoISGrdquo) (see footnote 40 below) or are parties to a comprehensive surveillance sharing agreement with the Exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 43 of 64
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index
Investment Restrictions
The Fund will not invest 25 or more of the value of its total assets in securities
of issuers in any one industry This restriction does not apply to (a) obligations issued or
guaranteed by the US government its agencies or instrumentalities or (b) securities of
other investment companies29
The Fund may hold up to an aggregate amount of 15 of its net assets in illiquid
assets (calculated at the time of investment) including Rule 144A securities deemed
illiquid by the Adviser30 The Fund will monitor its portfolio liquidity on an ongoing
basis to determine whether in light of current circumstances an adequate level of
liquidity is being maintained and will consider taking appropriate steps in order to
maintain adequate liquidity if through a change in values net assets or other
circumstances more than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid
assets include securities subject to contractual or other restrictions on resale and other
29 See Form N-1A Item 9 The Commission has taken the position that a fund is concentrated if it invests more than 25 of the value of its total assets in any one industry See eg Investment Company Act Release No 9011 (October 30 1975) 40 FR 54241 (November 21 1975)
30 In reaching liquidity decisions the Adviser may consider the following factors the frequency of trades and quotes for the security the number of dealers wishing to purchase or sell the security and the number of other potential purchasers dealer undertakings to make a market in the security and the nature of the security and the nature of the marketplace in which it trades (eg the time needed to dispose of the security the method of soliciting offers and the mechanics of transfer)
SR-NASDAQ-2015-011 Amendment No 2 Page 44 of 64
instruments that lack readily available markets as determined in accordance with
Commission staff guidance31
The Fund will not invest in non-US equity securities
Creation and Redemption of Shares
The Fund will issue and redeem Shares on a continuous basis at net asset value
(ldquoNAVrdquo)32 only in large blocks of Shares (ldquoCreation Unitsrdquo) in transactions with
authorized participants generally including broker-dealers and large institutional
investors (ldquoAuthorized Participantsrdquo) Creation Units generally will consist of 50000
Shares although this may change from time to time Creation Units however are not
expected to consist of less than 50000 Shares As described in the Registration
Statement and consistent with the Exemptive Relief the Fund will issue and redeem
Creation Units in exchange for an in-kind portfolio of instruments andor cash in lieu of
31 The Commission has stated that long-standing Commission guidelines have required open-end funds to hold no more than 15 of their net assets in illiquid securities and other illiquid assets See Investment Company Act Release No 28193 (March 11 2008) 73 FR 14618 (March 18 2008) footnote 34 See also Investment Company Act Release No 5847 (October 21 1969) 35 FR 19989 (December 31 1970) (Statement Regarding ldquoRestricted Securitiesrdquo) Investment Company Act Release No 18612 (March 12 1992) 57 FR 9828 (March 20 1992) (Revisions of Guidelines to Form N-1A) A fundrsquos portfolio security is illiquid if it cannot be disposed of in the ordinary course of business within seven days at approximately the value ascribed to it by the fund See Investment Company Act Release No 14983 (March 12 1986) 51 FR 9773 (March 21 1986) (adopting amendments to Rule 2a-7 under the 1940 Act) Investment Company Act Release No 17452 (April 23 1990) 55 FR 17933 (April 30 1990) (adopting Rule 144A under the Securities Act of 1933)
32 The NAV of the Fundrsquos Shares generally will be calculated once daily Monday through Friday as of the close of regular trading on the New York Stock Exchange generally 400 pm Eastern Time (the ldquoNAV Calculation Timerdquo) NAV per Share will be calculated by dividing the Fundrsquos net assets by the number of Fund Shares outstanding For more information regarding the valuation of Fund investments in calculating the Fundrsquos NAV see the Registration Statement
SR-NASDAQ-2015-011 Amendment No 2 Page 45 of 64
such instruments (the ldquoCreation Basketrdquo) In addition if there is a difference between the
NAV attributable to a Creation Unit and the market value of the Creation Basket
exchanged for the Creation Unit the party conveying instruments with the lower value
will pay to the other an amount in cash equal to the difference (referred to as the ldquoCash
Componentrdquo)
Creations and redemptions must be made by or through an Authorized Participant
that has executed an agreement that has been agreed to by the Distributor and BNY with
respect to creations and redemptions of Creation Units All standard orders to create
Creation Units must be received by the transfer agent no later than the closing time of the
regular trading session on the New York Stock Exchange (ordinarily 400 pm Eastern
Time) (the ldquoClosing Timerdquo) in each case on the date such order is placed in order for the
creation of Creation Units to be effected based on the NAV of Shares as next determined
on such date after receipt of the order in proper form Shares may be redeemed only in
Creation Units at their NAV next determined after receipt not later than the Closing Time
of a redemption request in proper form by the Fund through the transfer agent and only
on a business day
The Fundrsquos custodian through the National Securities Clearing Corporation will
make available on each business day prior to the opening of business of the Exchange
the list of the names and quantities of the instruments comprising the Creation Basket as
well as the estimated Cash Component (if any) for that day The published Creation
Basket will apply until a new Creation Basket is announced on the following business
day prior to commencement of trading in the Shares
SR-NASDAQ-2015-011 Amendment No 2 Page 46 of 64
Net Asset Value
The Fundrsquos NAV will be determined as of the close of trading (normally
400 pm Eastern Time) on each day the New York Stock Exchange is open for
business NAV will be calculated for the Fund by taking the market price of the Fundrsquos
total assets including interest or dividends accrued but not yet collected less all
liabilities and dividing such amount by the total number of Shares outstanding The
result rounded to the nearest cent will be the NAV per Share All valuations will be
subject to review by the Board of Trustees of the Trust (ldquoTrust Boardrdquo) or its delegate
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with valuation procedures (which may be revised from time to time) adopted by the Trust
Board (the ldquoValuation Proceduresrdquo) and in accordance with the 1940 Act A market
valuation generally means a valuation (i) obtained from an exchange an independent
pricing service (ldquoPricing Servicerdquo) or a major market maker (or dealer) or (ii) based on a
price quotation or other equivalent indication of value supplied by an exchange a Pricing
Service or a major market maker (or dealer) The information summarized below is
based on the Valuation Procedures as currently in effect however as noted above the
Valuation Procedures are amended from time to time and therefore such information is
subject to change
Certain securities including Floating Rate Debt Instruments in which the Fund
may invest will not be listed on any securities exchange or board of trade Such
securities will typically be bought and sold by institutional investors in individually
negotiated private transactions that function in many respects like an over-the-counter
SR-NASDAQ-2015-011 Amendment No 2 Page 47 of 64
secondary market although typically no formal market makers will exist Certain
securities particularly debt securities will have few or no trades or trade infrequently
and information regarding a specific security may not be widely available or may be
incomplete Accordingly determinations of the fair value of debt securities may be
based on infrequent and dated information Because there is less reliable objective data
available elements of judgment may play a greater role in valuation of debt securities
than for other types of securities Typically Floating Rate Debt Instruments and other
debt securities in which the Fund may invest (other than those described below) will be
valued using information provided by a Pricing Service Debt securities having a
remaining maturity of 60 days or less when purchased will be valued at cost adjusted for
amortization of premiums and accretion of discounts provided the Adviserrsquos pricing
committee (the ldquoPricing Committeerdquo) has determined that the use of amortized cost is an
appropriate reflection of fair value given market and issuer-specific conditions existing at
the time of the determination Overnight repurchase agreements will be valued at cost
and term repurchase agreements (ie those whose maturity exceeds seven days) will be
valued at the average of the bid quotations obtained daily from at least two recognized
dealers
Asset-backed and mortgage-backed securities will generally be valued by using a
Pricing Service If a Pricing Service does not cover a particular asset-backed or
mortgage-backed security or discontinues covering a particular asset-backed or
mortgage-backed security the security will be priced using broker quotes generally
provided by brokers that make or participate in markets in the security To derive values
Pricing Services and broker-dealers may use matrix pricing and valuation models as well
SR-NASDAQ-2015-011 Amendment No 2 Page 48 of 64
as recent market transactions for the same or similar assets As it deems appropriate the
Pricing Committee may determine that a Pricing Service price does not represent an
accurate value of an asset-backed or mortgage-backed security based on broker quotes it
receives a recent trade in the security by the Fund information from a portfolio manager
or other market information In the event that the Pricing Committee determines that the
Pricing Service price is unreliable or inaccurate based on such other information broker
quotes may be used Additionally if the Pricing Committee determines that the price of
an asset-backed or mortgage-backed security obtained from a Pricing Service and
available broker quotes is unreliable or inaccurate due to market conditions or other
reasons or if a Pricing Service price or broker quote is unavailable the security will be
valued using fair value pricing as described below
Equity securities listed on any exchange other than the Exchange will be valued at
the last sale price on the exchange on which they are principally traded on the business
day as of which such value is being determined Equity securities listed on the Exchange
will be valued at the official closing price on the business day as of which such value is
being determined If there has been no sale on such day or no official closing price in
the case of securities traded on the Exchange the securities will be valued using fair
value pricing as described below Equity securities traded on more than one securities
exchange will be valued at the last sale price or official closing price as applicable on
the business day as of which such value is being determined at the close of the exchange
representing the principal market for such securities
Exchange-traded options and futures contracts will be valued at the closing price
in the market where such contracts are principally traded
SR-NASDAQ-2015-011 Amendment No 2 Page 49 of 64
Certain securities including Floating Rate Debt Instruments in which the Fund
will invest will not be able to be priced by pre-established pricing methods Such
securities may be valued by the Trust Board or its delegate at fair value The use of fair
value pricing by the Fund will be governed by the Valuation Procedures and conducted in
accordance with the provisions of the 1940 Act Valuing the Fundrsquos securities using fair
value pricing will result in using prices for those securities that may differ from current
market valuations or official closing prices on the applicable exchange
Availability of Information
The Fundrsquos website (wwwftportfolioscom) which will be publicly available
prior to the public offering of Shares will include a form of the prospectus for the Fund
that may be downloaded The website will include the Sharesrsquo ticker CUSIP and
exchange information along with additional quantitative information updated on a daily
basis including for the Fund (1) daily trading volume the prior business dayrsquos reported
NAV and closing price mid-point of the bidask spread at the time of calculation of such
NAV (the ldquoBidAsk Pricerdquo)33 and a calculation of the premium and discount of the
BidAsk Price against the NAV and (2) data in chart format displaying the frequency
distribution of discounts and premiums of the daily BidAsk Price against the NAV
within appropriate ranges for each of the four previous calendar quarters On each
business day before commencement of trading in Shares in the Regular Market Session34
33 The BidAsk Price of the Fund will be determined using the mid-point of the highest bid and the lowest offer on the Exchange as of the time of calculation of the Fundrsquos NAV The records relating to BidAsk Prices will be retained by the Fund and its service providers
34 See Nasdaq Rule 4120(b)(4) (describing the three trading sessions on the Exchange (1) Pre-Market Session from 4 am to 930 am Eastern Time (2)
SR-NASDAQ-2015-011 Amendment No 2 Page 50 of 64
on the Exchange the Fund will disclose on its website the identities and quantities of the
portfolio of securities and other assets (the ldquoDisclosed Portfoliordquo as defined in Nasdaq
Rule 5735(c)(2)) held by the Fund that will form the basis for the Fundrsquos calculation of
NAV at the end of the business day 35 The Fundrsquos disclosure of derivative positions in
the Disclosed Portfolio will include information that market participants can use to value
these positions intraday On a daily basis the Fund will disclose on the Fundrsquos website
the following information regarding each portfolio holding as applicable to the type of
holding ticker symbol CUSIP number or other identifier if any a description of the
holding (including the type of holding) the identity of the security or other asset or
instrument underlying the holding if any for options the option strike price quantity
held (as measured by for example par value notional value or number of shares
contracts or units) maturity date if any coupon rate if any effective date if any market
value of the holding and percentage weighting of the holding in the Fundrsquos portfolio
The website information will be publicly available at no charge
In addition for the Fund an estimated value defined in Rule 5735(c)(3) as the
ldquoIntraday Indicative Valuerdquo that reflects an estimated intraday value of the Fundrsquos
Disclosed Portfolio will be disseminated Moreover the Intraday Indicative Value
Regular Market Session from 930 am to 4 pm or 415 pm Eastern Time and (3) Post-Market Session from 4 pm or 415 pm to 8 pm Eastern Time)
Under accounting procedures to be followed by the Fund trades made on the prior business day (ldquoTrdquo) will be booked and reflected in NAV on the current business day (ldquoT+1rdquo) Accordingly the Fund will be able to disclose at the beginning of the business day the portfolio that will form the basis for the NAV calculation at the end of the business day
35
SR-NASDAQ-2015-011 Amendment No 2 Page 51 of 64
available on the NASDAQ OMX Information LLC proprietary index data service36 will
be based upon the current value for the components of the Disclosed Portfolio and will be
updated and widely disseminated by one or more major market data vendors and broadly
displayed at least every 15 seconds during the Regular Market Session The Intraday
Indicative Value will be based on quotes and closing prices from the securitiesrsquo local
market and may not reflect events that occur subsequent to the local marketrsquos close
Premiums and discounts between the Intraday Indicative Value and the market price may
occur This should not be viewed as a ldquoreal timerdquo update of the NAV per Share of the
Fund which is calculated only once a day
The dissemination of the Intraday Indicative Value together with the Disclosed
Portfolio will allow investors to determine the value of the underlying portfolio of the
Fund on a daily basis and will provide a close estimate of that value throughout the
trading day
Investors will also be able to obtain the Fundrsquos Statement of Additional
Information (ldquoSAIrdquo) the Fundrsquos annual and semi-annual reports (together ldquoShareholder
Reportsrdquo) and its Form N-CSR and Form N-SAR filed twice a year The Fundrsquos SAI
and Shareholder Reports will be available free upon request from the Fund and those
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or
downloaded from the Commissionrsquos website at wwwsecgov Information regarding
Currently the NASDAQ OMX Global Index Data Service (ldquoGIDSrdquo) is the NASDAQ OMX global index data feed service offering real-time updates daily summary messages and access to widely followed indexes and Intraday Indicative Values for ETFs GIDS provides investment professionals with the daily information needed to track or trade NASDAQ OMX indexes listed ETFs or third-party partner indexes and ETFs
36
SR-NASDAQ-2015-011 Amendment No 2 Page 52 of 64
market price and trading volume of the Shares will be continually available on a real-time
basis throughout the day on brokersrsquo computer screens and other electronic services
Information regarding the previous dayrsquos closing price and trading volume information
for the Shares will be published daily in the financial section of newspapers Quotation
and last sale information for the Shares will be available via Nasdaq proprietary quote
and trade services as well as in accordance with the Unlisted Trading Privileges and the
Consolidated Tape Association (ldquoCTArdquo) plans for the Shares Quotation and last sale
information for the other ETFs in which the Fund will invest will be available via the
quote and trade services of their respective primary exchanges as well as in accordance
with the Unlisted Trading Privileges and the CTA plans as applicable Quotation and
last sale information for US exchange-traded options will be available via the Options
Price Reporting Authority Intraday executable price quotations on Floating Rate Debt
Instruments and other assets not traded on an exchange will be available from major
broker-dealer firms or market data vendors as well as from automated quotation systems
published or other public sources or online information services Additionally the Trade
Reporting and Compliance Engine (ldquoTRACErdquo) of the Financial Industry Regulatory
Authority (ldquoFINRArdquo) will be a source of price information for corporate bonds
privately-issued securities mortgage-backed securities and asset-backed securities to the
extent transactions in such securities are reported to TRACE37 For exchange-traded
Broker-dealers that are FINRA member firms have an obligation to report transactions in specified debt securities to TRACE to the extent required under applicable FINRA rules Generally such debt securities will have at issuance a maturity that exceeds one calendar year
37
SR-NASDAQ-2015-011 Amendment No 2 Page 53 of 64
assets intraday pricing information will be available directly from the applicable listing
exchange
Additional information regarding the Fund and the Shares including investment
strategies risks creation and redemption procedures fees Fund holdings disclosure
policies distributions and taxes will be included in the Registration Statement
Initial and Continued Listing
The Shares will be subject to Rule 5735 which sets forth the initial and continued
listing criteria applicable to Managed Fund Shares The Exchange represents that for
initial andor continued listing the Fund must be in compliance with Rule 10A-338 under
the Act A minimum of 100000 Shares will be outstanding at the commencement of
trading on the Exchange The Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the NAV and the
Disclosed Portfolio will be made available to all market participants at the same time
Trading Halts
With respect to trading halts the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading in the Shares of the Fund Nasdaq will
halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12) Trading may be
halted because of market conditions or for reasons that in the view of the Exchange
make trading in the Shares inadvisable These may include (1) the extent to which
trading is not occurring in the securities andor the other assets constituting the Disclosed
Portfolio of the Fund or (2) whether other unusual conditions or circumstances
See 17 CFR 24010A-3 38
SR-NASDAQ-2015-011 Amendment No 2 Page 54 of 64
detrimental to the maintenance of a fair and orderly market are present Trading in the
Shares also will be subject to Rule 5735(d)(2)(D) which sets forth circumstances under
which Shares of the Fund may be halted
Trading Rules
Nasdaq deems the Shares to be equity securities thus rendering trading in the
Shares subject to Nasdaqrsquos existing rules governing the trading of equity securities
Nasdaq will allow trading in the Shares from 400 am until 800 pm Eastern Time
The Exchange has appropriate rules to facilitate transactions in the Shares during all
trading sessions As provided in Nasdaq Rule 5735(b)(3) the minimum price variation
for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $001
Surveillance
The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws39 The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities laws
The surveillances referred to above generally focus on detecting securities trading
outside their normal patterns which could be indicative of manipulative or other violative
activity When such situations are detected surveillance analysis follows and
FINRA surveils trading on the Exchange pursuant to a regulatory services agreement The Exchange is responsible for FINRArsquos performance under this regulatory services agreement
39
SR-NASDAQ-2015-011 Amendment No 2 Page 55 of 64
investigations are opened where appropriate to review the behavior of all relevant
parties for all relevant trading violations
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 56 of 64
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
SR-NASDAQ-2015-011 Amendment No 2 Page 57 of 64
2 Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
SR-NASDAQ-2015-011 Amendment No 2 Page 58 of 64
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
SR-NASDAQ-2015-011 Amendment No 2 Page 59 of 64
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
SR-NASDAQ-2015-011 Amendment No 2 Page 60 of 64
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 61 of 64
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
SR-NASDAQ-2015-011 Amendment No 2 Page 62 of 64
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
B Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
C Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received From Members Participants or Others
Written comments were neither solicited nor received
III Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Within 45 days of the date of publication of this notice in the Federal Register or
within such longer period (i) as the Commission may designate up to 90 days of such date
if it finds such longer period to be appropriate and publishes its reasons for so finding or
(ii) as to which the Exchange consents the Commission shall (a) by order approve or
disapprove such proposed rule change or (b) institute proceedings to determine whether
the proposed rule change should be disapproved
SR-NASDAQ-2015-011 Amendment No 2 Page 63 of 64
IV Solicitation of Comments
Interested persons are invited to submit written data views and arguments
concerning the foregoing including whether the proposed rule change is consistent with
the Act Comments may be submitted by any of the following methods
Electronic comments
bull Use the Commissionrsquos Internet comment form
(httpwwwsecgovrulessroshtml) or
bull Send an e-mail to rule-commentssecgov Please include File Number
SR-NASDAQ-2015-011 on the subject line
Paper comments
bull Send paper comments in triplicate to Brent J Fields Secretary Securities and
Exchange Commission Station Place 100 F Street NE Washington DC
20549-9303
All submissions should refer to File Number SR-NASDAQ-2015-011 This file number
should be included on the subject line if e-mail is used To help the Commission process
and review your comments more efficiently please use only one method The
Commission will post all comments on the Commissionrsquos Internet website
httpwwwsecgovrulessroshtml
Copies of the submission all subsequent amendments all written statements with
respect to the proposed rule change that are filed with the Commission and all written
communications relating to the proposed rule change between the Commission and any
person other than those that may be withheld from the public in accordance with the
provisions of 5 USC 552 will be available for website viewing and printing in the
Commissionrsquos Public Reference Room 100 F Street NE Washington DC 20549 on
SR-NASDAQ-2015-011 Amendment No 2 Page 64 of 64
official business days between the hours of 1000 am and 300 pm Copies of the filing
also will be available for inspection and copying at the principal office of Nasdaq All
comments received will be posted without change the Commission does not edit
personal identifying information from submissions You should submit only information
that you wish to make available publicly
All submissions should refer to File Number SR-NASDAQ-2015-011 and should
be submitted on or before [insert date 21 days from publication in the Federal Register]
For the Commission by the Division of Trading and Markets pursuant to
delegated authority41
Kevin M OrsquoNeill Deputy Secretary
17 CFR 20030-3(a)(12) 41
SR-NASDAQ-2015-011 Amendment No 2 Page 38 of 64
net assets in a portfolio of the following types of floating-rate9 debt instruments issued by
US and non-US public- and private-sector entities floating-rate corporate10 and
government bonds and notes floating-rate agency securities 11 floating-rate instruments
of non-US issuers floating-rate privately-issued securities 12 floating-rate asset-backed
securities 13 floating-rate mortgage-backed securities14 floating-rate loans 15 and
9 For the avoidance of doubt the term ldquofloating-raterdquo shall also include similar terms such as ldquovariable-raterdquo and ldquoadjustable-raterdquo
10 The Adviser expects that under normal market conditions generally for a corporate bond to be considered as an eligible investment after taking into account such an investment at least 75 of the Fundrsquos net assets that are invested in floating-rate corporate bonds and as described below fixed-rate corporate bonds (in the aggregate) will be comprised of corporate bonds that have at the time of original issuance $100 million or more par amount outstanding
11 ldquoAgency securitiesrdquo for these purposes generally includes securities issued by the following entities Government National Mortgage Association (Ginnie Mae) Federal National Mortgage Association (Fannie Mae) Federal Home Loan Banks (FHLBanks) Federal Home Loan Mortgage Corporation (Freddie Mac) Farm Credit System (FCS) Farm Credit Banks (FCBanks) Student Loan Marketing Association (Sallie Mae) Resolution Funding Corporation (REFCORP) Financing Corporation (FICO) and the Farm Credit System (FCS) Financial Assistance Corporation (FAC) Agency securities can include but are not limited to mortgage-backed securities
12 ldquoPrivately-issued securitiesrdquo for these purposes generally includes Rule 144A securities other than mortgage-backed Rule 144A securities Under normal market conditions privately-issued securities will have at the time of original issuance $100 million or more principal amount outstanding to be considered eligible investments
13 Asset-backed securities are securities that are backed by a pool of assets The Fund currently intends to invest in asset-backed securities that are consumer asset-backed securities
14 Mortgage-backed securities which are securities that directly or indirectly represent a participation in or are secured by and payable from mortgage loans on real property will consist of (1) residential mortgage-backed securities (ldquoRMBSrdquo) (2) commercial mortgage-backed securities (ldquoCMBSrdquo) (3) stripped mortgage-backed securities (ldquoSMBSrdquo) which are mortgage-backed securities
SR-NASDAQ-2015-011 Amendment No 2 Page 39 of 64
investment companies16 (including investment companies advised by the Adviser) that
invest primarily in the foregoing types of debt instruments17 (collectively ldquoFloating Rate
Debt Instrumentsrdquo)
where mortgage payments are divided between paying the loanrsquos principal and paying the loanrsquos interest (4) collateralized mortgage obligations (ldquoCMOsrdquo) and real estate mortgage investment conduits (ldquoREMICsrdquo) which are mortgage-backed securities that are divided into multiple classes with each class being entitled to a different share of the principal and interest payments received from the pool of underlying assets
15 The floating-rate loans in which the Fund will invest will represent amounts borrowed by companies or other entities from banks and other lenders and a significant portion of such floating-rate loans may be rated below investment grade or unrated Floating-rate loans held by the Fund may be senior or subordinate obligations of the borrower and may or may not be secured by collateral First lien senior secured floating-rate loans are referred to herein as ldquosenior loansrdquo Floating-rate loans that are not senior loans (ie unsecured floating-rate loans and secured floating-rate loans that are not first lien floating-rate loans) are referred to herein as ldquojunior loansrdquo The Fund will generally invest in floating-rate loans that the Adviser deems to be liquid with readily available prices notwithstanding the foregoing the Fund may invest in floating-rate loans that are deemed illiquid so long as the Fund complies with the 15 limitation on investments of its net assets in illiquid assets described below under ldquoInvestment Restrictionsrdquo
16 The Fund currently anticipates investing only in registered open-end investment companies that are listed and traded in the US on registered exchanges (ie other ETFs) An ETF is an investment company registered under the 1940 Act that holds a portfolio of securities Many ETFs are designed to track the performance of a securities index including industry sector country and region indexes The Fund may invest in the securities of ETFs in excess of the limits imposed under the 1940 Act pursuant to exemptive orders obtained by other ETFs and their sponsors from the Commission In addition the Fund may invest in the securities of certain investment companies in excess of the limits imposed under the 1940 Act pursuant to an exemptive order obtained by the Trust and the Adviser from the Commission See Investment Company Act Release No 30377 (February 5 2013) (File No 812-13895) The ETFs in which the Fund may invest include Index Fund Shares (as described in Nasdaq Rule 5705) Portfolio Depository Receipts (as described in Nasdaq Rule 5705) and Managed Fund Shares (as described in Nasdaq Rule 5735) While the Fund may invest in inverse ETFs the Fund will not invest in leveraged or inverse leveraged (eg 2X or -3X) ETFs
SR-NASDAQ-2015-011 Amendment No 2 Page 40 of 64
At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade To be considered
ldquoinvestment graderdquo under normal market conditions rated Floating Rate Debt
Instruments will carry at the time of purchase a rating in the highest four rating
categories of at least one nationally recognized statistical ratings organization
(ldquoNRSROrdquo) (eg BBB- or higher by Standard amp Poorrsquos Ratings Services (ldquoSampPrdquo)
andor Fitch Ratings (ldquoFitchrdquo) or Baa3 or higher by Moodyrsquos Investors Service Inc
(ldquoMoodyrsquosrdquo)18 For unrated securities to be considered ldquoinvestment graderdquo under normal
market conditions such securities will be determined at the time of purchase to be of
comparable quality19 by the Adviser The Fund may invest up to 35 of its net assets in
securities that are at the time of investment rated below investment grade by each
NRSRO rating such securities (or securities that are unrated and determined by the
17 The liquidity of a security especially in the case of asset-backed and mortgage-backed securities will be a substantial factor in the Fundrsquos security selection process Consistent with the discussion below under ldquoInvestment Restrictionsrdquo the Fund will not purchase any Floating Rate Debt Instruments (including asset-backed securities and mortgage-backed securities) that in the Adviserrsquos opinion are illiquid if as a result more than 15 of the value of the Fundrsquos net assets will be invested in illiquid assets
18 For the avoidance of doubt if a security is rated by multiple NRSROs and receives different ratings the Fund will treat the security as being rated in the highest rating category received from an NRSRO
19 Comparable quality of unrated securities will be determined by the Adviser based on fundamental credit analysis of the unrated security and comparable NRSRO-rated securities On a best efforts basis the Adviser will attempt to make a rating determination based on publicly available data In making a ldquocomparable qualityrdquo determination the Adviser may consider for example whether the issuer of the security has issued other rated securities the nature and provisions of the relevant security whether the obligations under the relevant security are guaranteed by another entity and the rating of such guarantor (if any) relevant cash flows macroeconomic analysis andor sector or industry analysis
SR-NASDAQ-2015-011 Amendment No 2 Page 41 of 64
Adviser to be of comparable quality) commonly referred to as ldquohigh yieldrdquo or ldquojunkrdquo
bonds If subsequent to purchase by the Fund a security held by the Fund experiences a
decline in credit quality and falls below investment grade the Fund may continue to hold
the security and it will not cause the Fund to violate the 35 investment limitation
however the security will be taken into account for purposes of determining whether
purchases of additional securities will cause the Fund to violate such limitation
The Fund will limit its investments in asset-backed securities (excluding agency
mortgage-backed securities) and non-agency mortgage-backed securities (in the
aggregate) to 20 of its net assets20 In addition the Fund will limit its investments in
junior loans to 20 of its net assets
The Fund will hold debt securities (including in the aggregate Floating Rate
Debt Instruments and the fixed-rate debt securities described below) of at least 13
non-affiliated issuers
Other Investments
Under normal market conditions the Fund will invest primarily in the Floating
Rate Debt Instruments described above to meet its investment objective In addition the
Fund may invest up to 20 of its net assets in the following types of fixed-rate debt
securities corporate21 and government bonds and notes agency securities22 instruments
20 For the avoidance of doubt there is no limitation on the Fundrsquos investments in agency mortgage-backed securities
21 See footnote 10 above
22 See footnote 11 above
SR-NASDAQ-2015-011 Amendment No 2 Page 42 of 64
of non-US issuers in developed markets privately-issued securities 23 asset-backed
securities 24 mortgage-backed securities 25 municipal bonds money market securities26
and investment companies27 (including investment companies advised by the Adviser)
that invest primarily in the foregoing types of debt securities
Further to pursue its investment objective the Fund may invest up to 20 of the
value of its net assets in exchange-listed options on US Treasury futures contracts and
exchange-listed US Treasury futures contracts28 The use of these derivative
transactions may allow the Fund to obtain net long or short exposures to selected interest
rates These derivatives may also be used to hedge risks including interest rate risks and
credit risks associated with the Fundrsquos portfolio investments The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
23 See footnote 12 above
24 See footnote 13 above
25 See footnote 14 above
26 ldquoMoney market securitiesrdquo for these purposes generally includes short-term high-quality obligations issued or guaranteed by the US Treasury or the agencies or instrumentalities of the US government short-term high-quality securities issued or guaranteed by non-US governments agencies and instrumentalities repurchase agreements commercial paper (both asset-backed and non-assetshybacked) and deposits and other obligations of US and non-US banks and financial institutions
27 See footnote 16 above
28 At least 90 of the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be invested in instruments that trade in markets that are members of the Intermarket Surveillance Group (ldquoISGrdquo) (see footnote 40 below) or are parties to a comprehensive surveillance sharing agreement with the Exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 43 of 64
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index
Investment Restrictions
The Fund will not invest 25 or more of the value of its total assets in securities
of issuers in any one industry This restriction does not apply to (a) obligations issued or
guaranteed by the US government its agencies or instrumentalities or (b) securities of
other investment companies29
The Fund may hold up to an aggregate amount of 15 of its net assets in illiquid
assets (calculated at the time of investment) including Rule 144A securities deemed
illiquid by the Adviser30 The Fund will monitor its portfolio liquidity on an ongoing
basis to determine whether in light of current circumstances an adequate level of
liquidity is being maintained and will consider taking appropriate steps in order to
maintain adequate liquidity if through a change in values net assets or other
circumstances more than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid
assets include securities subject to contractual or other restrictions on resale and other
29 See Form N-1A Item 9 The Commission has taken the position that a fund is concentrated if it invests more than 25 of the value of its total assets in any one industry See eg Investment Company Act Release No 9011 (October 30 1975) 40 FR 54241 (November 21 1975)
30 In reaching liquidity decisions the Adviser may consider the following factors the frequency of trades and quotes for the security the number of dealers wishing to purchase or sell the security and the number of other potential purchasers dealer undertakings to make a market in the security and the nature of the security and the nature of the marketplace in which it trades (eg the time needed to dispose of the security the method of soliciting offers and the mechanics of transfer)
SR-NASDAQ-2015-011 Amendment No 2 Page 44 of 64
instruments that lack readily available markets as determined in accordance with
Commission staff guidance31
The Fund will not invest in non-US equity securities
Creation and Redemption of Shares
The Fund will issue and redeem Shares on a continuous basis at net asset value
(ldquoNAVrdquo)32 only in large blocks of Shares (ldquoCreation Unitsrdquo) in transactions with
authorized participants generally including broker-dealers and large institutional
investors (ldquoAuthorized Participantsrdquo) Creation Units generally will consist of 50000
Shares although this may change from time to time Creation Units however are not
expected to consist of less than 50000 Shares As described in the Registration
Statement and consistent with the Exemptive Relief the Fund will issue and redeem
Creation Units in exchange for an in-kind portfolio of instruments andor cash in lieu of
31 The Commission has stated that long-standing Commission guidelines have required open-end funds to hold no more than 15 of their net assets in illiquid securities and other illiquid assets See Investment Company Act Release No 28193 (March 11 2008) 73 FR 14618 (March 18 2008) footnote 34 See also Investment Company Act Release No 5847 (October 21 1969) 35 FR 19989 (December 31 1970) (Statement Regarding ldquoRestricted Securitiesrdquo) Investment Company Act Release No 18612 (March 12 1992) 57 FR 9828 (March 20 1992) (Revisions of Guidelines to Form N-1A) A fundrsquos portfolio security is illiquid if it cannot be disposed of in the ordinary course of business within seven days at approximately the value ascribed to it by the fund See Investment Company Act Release No 14983 (March 12 1986) 51 FR 9773 (March 21 1986) (adopting amendments to Rule 2a-7 under the 1940 Act) Investment Company Act Release No 17452 (April 23 1990) 55 FR 17933 (April 30 1990) (adopting Rule 144A under the Securities Act of 1933)
32 The NAV of the Fundrsquos Shares generally will be calculated once daily Monday through Friday as of the close of regular trading on the New York Stock Exchange generally 400 pm Eastern Time (the ldquoNAV Calculation Timerdquo) NAV per Share will be calculated by dividing the Fundrsquos net assets by the number of Fund Shares outstanding For more information regarding the valuation of Fund investments in calculating the Fundrsquos NAV see the Registration Statement
SR-NASDAQ-2015-011 Amendment No 2 Page 45 of 64
such instruments (the ldquoCreation Basketrdquo) In addition if there is a difference between the
NAV attributable to a Creation Unit and the market value of the Creation Basket
exchanged for the Creation Unit the party conveying instruments with the lower value
will pay to the other an amount in cash equal to the difference (referred to as the ldquoCash
Componentrdquo)
Creations and redemptions must be made by or through an Authorized Participant
that has executed an agreement that has been agreed to by the Distributor and BNY with
respect to creations and redemptions of Creation Units All standard orders to create
Creation Units must be received by the transfer agent no later than the closing time of the
regular trading session on the New York Stock Exchange (ordinarily 400 pm Eastern
Time) (the ldquoClosing Timerdquo) in each case on the date such order is placed in order for the
creation of Creation Units to be effected based on the NAV of Shares as next determined
on such date after receipt of the order in proper form Shares may be redeemed only in
Creation Units at their NAV next determined after receipt not later than the Closing Time
of a redemption request in proper form by the Fund through the transfer agent and only
on a business day
The Fundrsquos custodian through the National Securities Clearing Corporation will
make available on each business day prior to the opening of business of the Exchange
the list of the names and quantities of the instruments comprising the Creation Basket as
well as the estimated Cash Component (if any) for that day The published Creation
Basket will apply until a new Creation Basket is announced on the following business
day prior to commencement of trading in the Shares
SR-NASDAQ-2015-011 Amendment No 2 Page 46 of 64
Net Asset Value
The Fundrsquos NAV will be determined as of the close of trading (normally
400 pm Eastern Time) on each day the New York Stock Exchange is open for
business NAV will be calculated for the Fund by taking the market price of the Fundrsquos
total assets including interest or dividends accrued but not yet collected less all
liabilities and dividing such amount by the total number of Shares outstanding The
result rounded to the nearest cent will be the NAV per Share All valuations will be
subject to review by the Board of Trustees of the Trust (ldquoTrust Boardrdquo) or its delegate
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with valuation procedures (which may be revised from time to time) adopted by the Trust
Board (the ldquoValuation Proceduresrdquo) and in accordance with the 1940 Act A market
valuation generally means a valuation (i) obtained from an exchange an independent
pricing service (ldquoPricing Servicerdquo) or a major market maker (or dealer) or (ii) based on a
price quotation or other equivalent indication of value supplied by an exchange a Pricing
Service or a major market maker (or dealer) The information summarized below is
based on the Valuation Procedures as currently in effect however as noted above the
Valuation Procedures are amended from time to time and therefore such information is
subject to change
Certain securities including Floating Rate Debt Instruments in which the Fund
may invest will not be listed on any securities exchange or board of trade Such
securities will typically be bought and sold by institutional investors in individually
negotiated private transactions that function in many respects like an over-the-counter
SR-NASDAQ-2015-011 Amendment No 2 Page 47 of 64
secondary market although typically no formal market makers will exist Certain
securities particularly debt securities will have few or no trades or trade infrequently
and information regarding a specific security may not be widely available or may be
incomplete Accordingly determinations of the fair value of debt securities may be
based on infrequent and dated information Because there is less reliable objective data
available elements of judgment may play a greater role in valuation of debt securities
than for other types of securities Typically Floating Rate Debt Instruments and other
debt securities in which the Fund may invest (other than those described below) will be
valued using information provided by a Pricing Service Debt securities having a
remaining maturity of 60 days or less when purchased will be valued at cost adjusted for
amortization of premiums and accretion of discounts provided the Adviserrsquos pricing
committee (the ldquoPricing Committeerdquo) has determined that the use of amortized cost is an
appropriate reflection of fair value given market and issuer-specific conditions existing at
the time of the determination Overnight repurchase agreements will be valued at cost
and term repurchase agreements (ie those whose maturity exceeds seven days) will be
valued at the average of the bid quotations obtained daily from at least two recognized
dealers
Asset-backed and mortgage-backed securities will generally be valued by using a
Pricing Service If a Pricing Service does not cover a particular asset-backed or
mortgage-backed security or discontinues covering a particular asset-backed or
mortgage-backed security the security will be priced using broker quotes generally
provided by brokers that make or participate in markets in the security To derive values
Pricing Services and broker-dealers may use matrix pricing and valuation models as well
SR-NASDAQ-2015-011 Amendment No 2 Page 48 of 64
as recent market transactions for the same or similar assets As it deems appropriate the
Pricing Committee may determine that a Pricing Service price does not represent an
accurate value of an asset-backed or mortgage-backed security based on broker quotes it
receives a recent trade in the security by the Fund information from a portfolio manager
or other market information In the event that the Pricing Committee determines that the
Pricing Service price is unreliable or inaccurate based on such other information broker
quotes may be used Additionally if the Pricing Committee determines that the price of
an asset-backed or mortgage-backed security obtained from a Pricing Service and
available broker quotes is unreliable or inaccurate due to market conditions or other
reasons or if a Pricing Service price or broker quote is unavailable the security will be
valued using fair value pricing as described below
Equity securities listed on any exchange other than the Exchange will be valued at
the last sale price on the exchange on which they are principally traded on the business
day as of which such value is being determined Equity securities listed on the Exchange
will be valued at the official closing price on the business day as of which such value is
being determined If there has been no sale on such day or no official closing price in
the case of securities traded on the Exchange the securities will be valued using fair
value pricing as described below Equity securities traded on more than one securities
exchange will be valued at the last sale price or official closing price as applicable on
the business day as of which such value is being determined at the close of the exchange
representing the principal market for such securities
Exchange-traded options and futures contracts will be valued at the closing price
in the market where such contracts are principally traded
SR-NASDAQ-2015-011 Amendment No 2 Page 49 of 64
Certain securities including Floating Rate Debt Instruments in which the Fund
will invest will not be able to be priced by pre-established pricing methods Such
securities may be valued by the Trust Board or its delegate at fair value The use of fair
value pricing by the Fund will be governed by the Valuation Procedures and conducted in
accordance with the provisions of the 1940 Act Valuing the Fundrsquos securities using fair
value pricing will result in using prices for those securities that may differ from current
market valuations or official closing prices on the applicable exchange
Availability of Information
The Fundrsquos website (wwwftportfolioscom) which will be publicly available
prior to the public offering of Shares will include a form of the prospectus for the Fund
that may be downloaded The website will include the Sharesrsquo ticker CUSIP and
exchange information along with additional quantitative information updated on a daily
basis including for the Fund (1) daily trading volume the prior business dayrsquos reported
NAV and closing price mid-point of the bidask spread at the time of calculation of such
NAV (the ldquoBidAsk Pricerdquo)33 and a calculation of the premium and discount of the
BidAsk Price against the NAV and (2) data in chart format displaying the frequency
distribution of discounts and premiums of the daily BidAsk Price against the NAV
within appropriate ranges for each of the four previous calendar quarters On each
business day before commencement of trading in Shares in the Regular Market Session34
33 The BidAsk Price of the Fund will be determined using the mid-point of the highest bid and the lowest offer on the Exchange as of the time of calculation of the Fundrsquos NAV The records relating to BidAsk Prices will be retained by the Fund and its service providers
34 See Nasdaq Rule 4120(b)(4) (describing the three trading sessions on the Exchange (1) Pre-Market Session from 4 am to 930 am Eastern Time (2)
SR-NASDAQ-2015-011 Amendment No 2 Page 50 of 64
on the Exchange the Fund will disclose on its website the identities and quantities of the
portfolio of securities and other assets (the ldquoDisclosed Portfoliordquo as defined in Nasdaq
Rule 5735(c)(2)) held by the Fund that will form the basis for the Fundrsquos calculation of
NAV at the end of the business day 35 The Fundrsquos disclosure of derivative positions in
the Disclosed Portfolio will include information that market participants can use to value
these positions intraday On a daily basis the Fund will disclose on the Fundrsquos website
the following information regarding each portfolio holding as applicable to the type of
holding ticker symbol CUSIP number or other identifier if any a description of the
holding (including the type of holding) the identity of the security or other asset or
instrument underlying the holding if any for options the option strike price quantity
held (as measured by for example par value notional value or number of shares
contracts or units) maturity date if any coupon rate if any effective date if any market
value of the holding and percentage weighting of the holding in the Fundrsquos portfolio
The website information will be publicly available at no charge
In addition for the Fund an estimated value defined in Rule 5735(c)(3) as the
ldquoIntraday Indicative Valuerdquo that reflects an estimated intraday value of the Fundrsquos
Disclosed Portfolio will be disseminated Moreover the Intraday Indicative Value
Regular Market Session from 930 am to 4 pm or 415 pm Eastern Time and (3) Post-Market Session from 4 pm or 415 pm to 8 pm Eastern Time)
Under accounting procedures to be followed by the Fund trades made on the prior business day (ldquoTrdquo) will be booked and reflected in NAV on the current business day (ldquoT+1rdquo) Accordingly the Fund will be able to disclose at the beginning of the business day the portfolio that will form the basis for the NAV calculation at the end of the business day
35
SR-NASDAQ-2015-011 Amendment No 2 Page 51 of 64
available on the NASDAQ OMX Information LLC proprietary index data service36 will
be based upon the current value for the components of the Disclosed Portfolio and will be
updated and widely disseminated by one or more major market data vendors and broadly
displayed at least every 15 seconds during the Regular Market Session The Intraday
Indicative Value will be based on quotes and closing prices from the securitiesrsquo local
market and may not reflect events that occur subsequent to the local marketrsquos close
Premiums and discounts between the Intraday Indicative Value and the market price may
occur This should not be viewed as a ldquoreal timerdquo update of the NAV per Share of the
Fund which is calculated only once a day
The dissemination of the Intraday Indicative Value together with the Disclosed
Portfolio will allow investors to determine the value of the underlying portfolio of the
Fund on a daily basis and will provide a close estimate of that value throughout the
trading day
Investors will also be able to obtain the Fundrsquos Statement of Additional
Information (ldquoSAIrdquo) the Fundrsquos annual and semi-annual reports (together ldquoShareholder
Reportsrdquo) and its Form N-CSR and Form N-SAR filed twice a year The Fundrsquos SAI
and Shareholder Reports will be available free upon request from the Fund and those
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or
downloaded from the Commissionrsquos website at wwwsecgov Information regarding
Currently the NASDAQ OMX Global Index Data Service (ldquoGIDSrdquo) is the NASDAQ OMX global index data feed service offering real-time updates daily summary messages and access to widely followed indexes and Intraday Indicative Values for ETFs GIDS provides investment professionals with the daily information needed to track or trade NASDAQ OMX indexes listed ETFs or third-party partner indexes and ETFs
36
SR-NASDAQ-2015-011 Amendment No 2 Page 52 of 64
market price and trading volume of the Shares will be continually available on a real-time
basis throughout the day on brokersrsquo computer screens and other electronic services
Information regarding the previous dayrsquos closing price and trading volume information
for the Shares will be published daily in the financial section of newspapers Quotation
and last sale information for the Shares will be available via Nasdaq proprietary quote
and trade services as well as in accordance with the Unlisted Trading Privileges and the
Consolidated Tape Association (ldquoCTArdquo) plans for the Shares Quotation and last sale
information for the other ETFs in which the Fund will invest will be available via the
quote and trade services of their respective primary exchanges as well as in accordance
with the Unlisted Trading Privileges and the CTA plans as applicable Quotation and
last sale information for US exchange-traded options will be available via the Options
Price Reporting Authority Intraday executable price quotations on Floating Rate Debt
Instruments and other assets not traded on an exchange will be available from major
broker-dealer firms or market data vendors as well as from automated quotation systems
published or other public sources or online information services Additionally the Trade
Reporting and Compliance Engine (ldquoTRACErdquo) of the Financial Industry Regulatory
Authority (ldquoFINRArdquo) will be a source of price information for corporate bonds
privately-issued securities mortgage-backed securities and asset-backed securities to the
extent transactions in such securities are reported to TRACE37 For exchange-traded
Broker-dealers that are FINRA member firms have an obligation to report transactions in specified debt securities to TRACE to the extent required under applicable FINRA rules Generally such debt securities will have at issuance a maturity that exceeds one calendar year
37
SR-NASDAQ-2015-011 Amendment No 2 Page 53 of 64
assets intraday pricing information will be available directly from the applicable listing
exchange
Additional information regarding the Fund and the Shares including investment
strategies risks creation and redemption procedures fees Fund holdings disclosure
policies distributions and taxes will be included in the Registration Statement
Initial and Continued Listing
The Shares will be subject to Rule 5735 which sets forth the initial and continued
listing criteria applicable to Managed Fund Shares The Exchange represents that for
initial andor continued listing the Fund must be in compliance with Rule 10A-338 under
the Act A minimum of 100000 Shares will be outstanding at the commencement of
trading on the Exchange The Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the NAV and the
Disclosed Portfolio will be made available to all market participants at the same time
Trading Halts
With respect to trading halts the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading in the Shares of the Fund Nasdaq will
halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12) Trading may be
halted because of market conditions or for reasons that in the view of the Exchange
make trading in the Shares inadvisable These may include (1) the extent to which
trading is not occurring in the securities andor the other assets constituting the Disclosed
Portfolio of the Fund or (2) whether other unusual conditions or circumstances
See 17 CFR 24010A-3 38
SR-NASDAQ-2015-011 Amendment No 2 Page 54 of 64
detrimental to the maintenance of a fair and orderly market are present Trading in the
Shares also will be subject to Rule 5735(d)(2)(D) which sets forth circumstances under
which Shares of the Fund may be halted
Trading Rules
Nasdaq deems the Shares to be equity securities thus rendering trading in the
Shares subject to Nasdaqrsquos existing rules governing the trading of equity securities
Nasdaq will allow trading in the Shares from 400 am until 800 pm Eastern Time
The Exchange has appropriate rules to facilitate transactions in the Shares during all
trading sessions As provided in Nasdaq Rule 5735(b)(3) the minimum price variation
for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $001
Surveillance
The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws39 The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities laws
The surveillances referred to above generally focus on detecting securities trading
outside their normal patterns which could be indicative of manipulative or other violative
activity When such situations are detected surveillance analysis follows and
FINRA surveils trading on the Exchange pursuant to a regulatory services agreement The Exchange is responsible for FINRArsquos performance under this regulatory services agreement
39
SR-NASDAQ-2015-011 Amendment No 2 Page 55 of 64
investigations are opened where appropriate to review the behavior of all relevant
parties for all relevant trading violations
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 56 of 64
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
SR-NASDAQ-2015-011 Amendment No 2 Page 57 of 64
2 Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
SR-NASDAQ-2015-011 Amendment No 2 Page 58 of 64
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
SR-NASDAQ-2015-011 Amendment No 2 Page 59 of 64
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
SR-NASDAQ-2015-011 Amendment No 2 Page 60 of 64
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 61 of 64
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
SR-NASDAQ-2015-011 Amendment No 2 Page 62 of 64
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
B Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
C Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received From Members Participants or Others
Written comments were neither solicited nor received
III Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Within 45 days of the date of publication of this notice in the Federal Register or
within such longer period (i) as the Commission may designate up to 90 days of such date
if it finds such longer period to be appropriate and publishes its reasons for so finding or
(ii) as to which the Exchange consents the Commission shall (a) by order approve or
disapprove such proposed rule change or (b) institute proceedings to determine whether
the proposed rule change should be disapproved
SR-NASDAQ-2015-011 Amendment No 2 Page 63 of 64
IV Solicitation of Comments
Interested persons are invited to submit written data views and arguments
concerning the foregoing including whether the proposed rule change is consistent with
the Act Comments may be submitted by any of the following methods
Electronic comments
bull Use the Commissionrsquos Internet comment form
(httpwwwsecgovrulessroshtml) or
bull Send an e-mail to rule-commentssecgov Please include File Number
SR-NASDAQ-2015-011 on the subject line
Paper comments
bull Send paper comments in triplicate to Brent J Fields Secretary Securities and
Exchange Commission Station Place 100 F Street NE Washington DC
20549-9303
All submissions should refer to File Number SR-NASDAQ-2015-011 This file number
should be included on the subject line if e-mail is used To help the Commission process
and review your comments more efficiently please use only one method The
Commission will post all comments on the Commissionrsquos Internet website
httpwwwsecgovrulessroshtml
Copies of the submission all subsequent amendments all written statements with
respect to the proposed rule change that are filed with the Commission and all written
communications relating to the proposed rule change between the Commission and any
person other than those that may be withheld from the public in accordance with the
provisions of 5 USC 552 will be available for website viewing and printing in the
Commissionrsquos Public Reference Room 100 F Street NE Washington DC 20549 on
SR-NASDAQ-2015-011 Amendment No 2 Page 64 of 64
official business days between the hours of 1000 am and 300 pm Copies of the filing
also will be available for inspection and copying at the principal office of Nasdaq All
comments received will be posted without change the Commission does not edit
personal identifying information from submissions You should submit only information
that you wish to make available publicly
All submissions should refer to File Number SR-NASDAQ-2015-011 and should
be submitted on or before [insert date 21 days from publication in the Federal Register]
For the Commission by the Division of Trading and Markets pursuant to
delegated authority41
Kevin M OrsquoNeill Deputy Secretary
17 CFR 20030-3(a)(12) 41
SR-NASDAQ-2015-011 Amendment No 2 Page 39 of 64
investment companies16 (including investment companies advised by the Adviser) that
invest primarily in the foregoing types of debt instruments17 (collectively ldquoFloating Rate
Debt Instrumentsrdquo)
where mortgage payments are divided between paying the loanrsquos principal and paying the loanrsquos interest (4) collateralized mortgage obligations (ldquoCMOsrdquo) and real estate mortgage investment conduits (ldquoREMICsrdquo) which are mortgage-backed securities that are divided into multiple classes with each class being entitled to a different share of the principal and interest payments received from the pool of underlying assets
15 The floating-rate loans in which the Fund will invest will represent amounts borrowed by companies or other entities from banks and other lenders and a significant portion of such floating-rate loans may be rated below investment grade or unrated Floating-rate loans held by the Fund may be senior or subordinate obligations of the borrower and may or may not be secured by collateral First lien senior secured floating-rate loans are referred to herein as ldquosenior loansrdquo Floating-rate loans that are not senior loans (ie unsecured floating-rate loans and secured floating-rate loans that are not first lien floating-rate loans) are referred to herein as ldquojunior loansrdquo The Fund will generally invest in floating-rate loans that the Adviser deems to be liquid with readily available prices notwithstanding the foregoing the Fund may invest in floating-rate loans that are deemed illiquid so long as the Fund complies with the 15 limitation on investments of its net assets in illiquid assets described below under ldquoInvestment Restrictionsrdquo
16 The Fund currently anticipates investing only in registered open-end investment companies that are listed and traded in the US on registered exchanges (ie other ETFs) An ETF is an investment company registered under the 1940 Act that holds a portfolio of securities Many ETFs are designed to track the performance of a securities index including industry sector country and region indexes The Fund may invest in the securities of ETFs in excess of the limits imposed under the 1940 Act pursuant to exemptive orders obtained by other ETFs and their sponsors from the Commission In addition the Fund may invest in the securities of certain investment companies in excess of the limits imposed under the 1940 Act pursuant to an exemptive order obtained by the Trust and the Adviser from the Commission See Investment Company Act Release No 30377 (February 5 2013) (File No 812-13895) The ETFs in which the Fund may invest include Index Fund Shares (as described in Nasdaq Rule 5705) Portfolio Depository Receipts (as described in Nasdaq Rule 5705) and Managed Fund Shares (as described in Nasdaq Rule 5735) While the Fund may invest in inverse ETFs the Fund will not invest in leveraged or inverse leveraged (eg 2X or -3X) ETFs
SR-NASDAQ-2015-011 Amendment No 2 Page 40 of 64
At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade To be considered
ldquoinvestment graderdquo under normal market conditions rated Floating Rate Debt
Instruments will carry at the time of purchase a rating in the highest four rating
categories of at least one nationally recognized statistical ratings organization
(ldquoNRSROrdquo) (eg BBB- or higher by Standard amp Poorrsquos Ratings Services (ldquoSampPrdquo)
andor Fitch Ratings (ldquoFitchrdquo) or Baa3 or higher by Moodyrsquos Investors Service Inc
(ldquoMoodyrsquosrdquo)18 For unrated securities to be considered ldquoinvestment graderdquo under normal
market conditions such securities will be determined at the time of purchase to be of
comparable quality19 by the Adviser The Fund may invest up to 35 of its net assets in
securities that are at the time of investment rated below investment grade by each
NRSRO rating such securities (or securities that are unrated and determined by the
17 The liquidity of a security especially in the case of asset-backed and mortgage-backed securities will be a substantial factor in the Fundrsquos security selection process Consistent with the discussion below under ldquoInvestment Restrictionsrdquo the Fund will not purchase any Floating Rate Debt Instruments (including asset-backed securities and mortgage-backed securities) that in the Adviserrsquos opinion are illiquid if as a result more than 15 of the value of the Fundrsquos net assets will be invested in illiquid assets
18 For the avoidance of doubt if a security is rated by multiple NRSROs and receives different ratings the Fund will treat the security as being rated in the highest rating category received from an NRSRO
19 Comparable quality of unrated securities will be determined by the Adviser based on fundamental credit analysis of the unrated security and comparable NRSRO-rated securities On a best efforts basis the Adviser will attempt to make a rating determination based on publicly available data In making a ldquocomparable qualityrdquo determination the Adviser may consider for example whether the issuer of the security has issued other rated securities the nature and provisions of the relevant security whether the obligations under the relevant security are guaranteed by another entity and the rating of such guarantor (if any) relevant cash flows macroeconomic analysis andor sector or industry analysis
SR-NASDAQ-2015-011 Amendment No 2 Page 41 of 64
Adviser to be of comparable quality) commonly referred to as ldquohigh yieldrdquo or ldquojunkrdquo
bonds If subsequent to purchase by the Fund a security held by the Fund experiences a
decline in credit quality and falls below investment grade the Fund may continue to hold
the security and it will not cause the Fund to violate the 35 investment limitation
however the security will be taken into account for purposes of determining whether
purchases of additional securities will cause the Fund to violate such limitation
The Fund will limit its investments in asset-backed securities (excluding agency
mortgage-backed securities) and non-agency mortgage-backed securities (in the
aggregate) to 20 of its net assets20 In addition the Fund will limit its investments in
junior loans to 20 of its net assets
The Fund will hold debt securities (including in the aggregate Floating Rate
Debt Instruments and the fixed-rate debt securities described below) of at least 13
non-affiliated issuers
Other Investments
Under normal market conditions the Fund will invest primarily in the Floating
Rate Debt Instruments described above to meet its investment objective In addition the
Fund may invest up to 20 of its net assets in the following types of fixed-rate debt
securities corporate21 and government bonds and notes agency securities22 instruments
20 For the avoidance of doubt there is no limitation on the Fundrsquos investments in agency mortgage-backed securities
21 See footnote 10 above
22 See footnote 11 above
SR-NASDAQ-2015-011 Amendment No 2 Page 42 of 64
of non-US issuers in developed markets privately-issued securities 23 asset-backed
securities 24 mortgage-backed securities 25 municipal bonds money market securities26
and investment companies27 (including investment companies advised by the Adviser)
that invest primarily in the foregoing types of debt securities
Further to pursue its investment objective the Fund may invest up to 20 of the
value of its net assets in exchange-listed options on US Treasury futures contracts and
exchange-listed US Treasury futures contracts28 The use of these derivative
transactions may allow the Fund to obtain net long or short exposures to selected interest
rates These derivatives may also be used to hedge risks including interest rate risks and
credit risks associated with the Fundrsquos portfolio investments The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
23 See footnote 12 above
24 See footnote 13 above
25 See footnote 14 above
26 ldquoMoney market securitiesrdquo for these purposes generally includes short-term high-quality obligations issued or guaranteed by the US Treasury or the agencies or instrumentalities of the US government short-term high-quality securities issued or guaranteed by non-US governments agencies and instrumentalities repurchase agreements commercial paper (both asset-backed and non-assetshybacked) and deposits and other obligations of US and non-US banks and financial institutions
27 See footnote 16 above
28 At least 90 of the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be invested in instruments that trade in markets that are members of the Intermarket Surveillance Group (ldquoISGrdquo) (see footnote 40 below) or are parties to a comprehensive surveillance sharing agreement with the Exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 43 of 64
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index
Investment Restrictions
The Fund will not invest 25 or more of the value of its total assets in securities
of issuers in any one industry This restriction does not apply to (a) obligations issued or
guaranteed by the US government its agencies or instrumentalities or (b) securities of
other investment companies29
The Fund may hold up to an aggregate amount of 15 of its net assets in illiquid
assets (calculated at the time of investment) including Rule 144A securities deemed
illiquid by the Adviser30 The Fund will monitor its portfolio liquidity on an ongoing
basis to determine whether in light of current circumstances an adequate level of
liquidity is being maintained and will consider taking appropriate steps in order to
maintain adequate liquidity if through a change in values net assets or other
circumstances more than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid
assets include securities subject to contractual or other restrictions on resale and other
29 See Form N-1A Item 9 The Commission has taken the position that a fund is concentrated if it invests more than 25 of the value of its total assets in any one industry See eg Investment Company Act Release No 9011 (October 30 1975) 40 FR 54241 (November 21 1975)
30 In reaching liquidity decisions the Adviser may consider the following factors the frequency of trades and quotes for the security the number of dealers wishing to purchase or sell the security and the number of other potential purchasers dealer undertakings to make a market in the security and the nature of the security and the nature of the marketplace in which it trades (eg the time needed to dispose of the security the method of soliciting offers and the mechanics of transfer)
SR-NASDAQ-2015-011 Amendment No 2 Page 44 of 64
instruments that lack readily available markets as determined in accordance with
Commission staff guidance31
The Fund will not invest in non-US equity securities
Creation and Redemption of Shares
The Fund will issue and redeem Shares on a continuous basis at net asset value
(ldquoNAVrdquo)32 only in large blocks of Shares (ldquoCreation Unitsrdquo) in transactions with
authorized participants generally including broker-dealers and large institutional
investors (ldquoAuthorized Participantsrdquo) Creation Units generally will consist of 50000
Shares although this may change from time to time Creation Units however are not
expected to consist of less than 50000 Shares As described in the Registration
Statement and consistent with the Exemptive Relief the Fund will issue and redeem
Creation Units in exchange for an in-kind portfolio of instruments andor cash in lieu of
31 The Commission has stated that long-standing Commission guidelines have required open-end funds to hold no more than 15 of their net assets in illiquid securities and other illiquid assets See Investment Company Act Release No 28193 (March 11 2008) 73 FR 14618 (March 18 2008) footnote 34 See also Investment Company Act Release No 5847 (October 21 1969) 35 FR 19989 (December 31 1970) (Statement Regarding ldquoRestricted Securitiesrdquo) Investment Company Act Release No 18612 (March 12 1992) 57 FR 9828 (March 20 1992) (Revisions of Guidelines to Form N-1A) A fundrsquos portfolio security is illiquid if it cannot be disposed of in the ordinary course of business within seven days at approximately the value ascribed to it by the fund See Investment Company Act Release No 14983 (March 12 1986) 51 FR 9773 (March 21 1986) (adopting amendments to Rule 2a-7 under the 1940 Act) Investment Company Act Release No 17452 (April 23 1990) 55 FR 17933 (April 30 1990) (adopting Rule 144A under the Securities Act of 1933)
32 The NAV of the Fundrsquos Shares generally will be calculated once daily Monday through Friday as of the close of regular trading on the New York Stock Exchange generally 400 pm Eastern Time (the ldquoNAV Calculation Timerdquo) NAV per Share will be calculated by dividing the Fundrsquos net assets by the number of Fund Shares outstanding For more information regarding the valuation of Fund investments in calculating the Fundrsquos NAV see the Registration Statement
SR-NASDAQ-2015-011 Amendment No 2 Page 45 of 64
such instruments (the ldquoCreation Basketrdquo) In addition if there is a difference between the
NAV attributable to a Creation Unit and the market value of the Creation Basket
exchanged for the Creation Unit the party conveying instruments with the lower value
will pay to the other an amount in cash equal to the difference (referred to as the ldquoCash
Componentrdquo)
Creations and redemptions must be made by or through an Authorized Participant
that has executed an agreement that has been agreed to by the Distributor and BNY with
respect to creations and redemptions of Creation Units All standard orders to create
Creation Units must be received by the transfer agent no later than the closing time of the
regular trading session on the New York Stock Exchange (ordinarily 400 pm Eastern
Time) (the ldquoClosing Timerdquo) in each case on the date such order is placed in order for the
creation of Creation Units to be effected based on the NAV of Shares as next determined
on such date after receipt of the order in proper form Shares may be redeemed only in
Creation Units at their NAV next determined after receipt not later than the Closing Time
of a redemption request in proper form by the Fund through the transfer agent and only
on a business day
The Fundrsquos custodian through the National Securities Clearing Corporation will
make available on each business day prior to the opening of business of the Exchange
the list of the names and quantities of the instruments comprising the Creation Basket as
well as the estimated Cash Component (if any) for that day The published Creation
Basket will apply until a new Creation Basket is announced on the following business
day prior to commencement of trading in the Shares
SR-NASDAQ-2015-011 Amendment No 2 Page 46 of 64
Net Asset Value
The Fundrsquos NAV will be determined as of the close of trading (normally
400 pm Eastern Time) on each day the New York Stock Exchange is open for
business NAV will be calculated for the Fund by taking the market price of the Fundrsquos
total assets including interest or dividends accrued but not yet collected less all
liabilities and dividing such amount by the total number of Shares outstanding The
result rounded to the nearest cent will be the NAV per Share All valuations will be
subject to review by the Board of Trustees of the Trust (ldquoTrust Boardrdquo) or its delegate
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with valuation procedures (which may be revised from time to time) adopted by the Trust
Board (the ldquoValuation Proceduresrdquo) and in accordance with the 1940 Act A market
valuation generally means a valuation (i) obtained from an exchange an independent
pricing service (ldquoPricing Servicerdquo) or a major market maker (or dealer) or (ii) based on a
price quotation or other equivalent indication of value supplied by an exchange a Pricing
Service or a major market maker (or dealer) The information summarized below is
based on the Valuation Procedures as currently in effect however as noted above the
Valuation Procedures are amended from time to time and therefore such information is
subject to change
Certain securities including Floating Rate Debt Instruments in which the Fund
may invest will not be listed on any securities exchange or board of trade Such
securities will typically be bought and sold by institutional investors in individually
negotiated private transactions that function in many respects like an over-the-counter
SR-NASDAQ-2015-011 Amendment No 2 Page 47 of 64
secondary market although typically no formal market makers will exist Certain
securities particularly debt securities will have few or no trades or trade infrequently
and information regarding a specific security may not be widely available or may be
incomplete Accordingly determinations of the fair value of debt securities may be
based on infrequent and dated information Because there is less reliable objective data
available elements of judgment may play a greater role in valuation of debt securities
than for other types of securities Typically Floating Rate Debt Instruments and other
debt securities in which the Fund may invest (other than those described below) will be
valued using information provided by a Pricing Service Debt securities having a
remaining maturity of 60 days or less when purchased will be valued at cost adjusted for
amortization of premiums and accretion of discounts provided the Adviserrsquos pricing
committee (the ldquoPricing Committeerdquo) has determined that the use of amortized cost is an
appropriate reflection of fair value given market and issuer-specific conditions existing at
the time of the determination Overnight repurchase agreements will be valued at cost
and term repurchase agreements (ie those whose maturity exceeds seven days) will be
valued at the average of the bid quotations obtained daily from at least two recognized
dealers
Asset-backed and mortgage-backed securities will generally be valued by using a
Pricing Service If a Pricing Service does not cover a particular asset-backed or
mortgage-backed security or discontinues covering a particular asset-backed or
mortgage-backed security the security will be priced using broker quotes generally
provided by brokers that make or participate in markets in the security To derive values
Pricing Services and broker-dealers may use matrix pricing and valuation models as well
SR-NASDAQ-2015-011 Amendment No 2 Page 48 of 64
as recent market transactions for the same or similar assets As it deems appropriate the
Pricing Committee may determine that a Pricing Service price does not represent an
accurate value of an asset-backed or mortgage-backed security based on broker quotes it
receives a recent trade in the security by the Fund information from a portfolio manager
or other market information In the event that the Pricing Committee determines that the
Pricing Service price is unreliable or inaccurate based on such other information broker
quotes may be used Additionally if the Pricing Committee determines that the price of
an asset-backed or mortgage-backed security obtained from a Pricing Service and
available broker quotes is unreliable or inaccurate due to market conditions or other
reasons or if a Pricing Service price or broker quote is unavailable the security will be
valued using fair value pricing as described below
Equity securities listed on any exchange other than the Exchange will be valued at
the last sale price on the exchange on which they are principally traded on the business
day as of which such value is being determined Equity securities listed on the Exchange
will be valued at the official closing price on the business day as of which such value is
being determined If there has been no sale on such day or no official closing price in
the case of securities traded on the Exchange the securities will be valued using fair
value pricing as described below Equity securities traded on more than one securities
exchange will be valued at the last sale price or official closing price as applicable on
the business day as of which such value is being determined at the close of the exchange
representing the principal market for such securities
Exchange-traded options and futures contracts will be valued at the closing price
in the market where such contracts are principally traded
SR-NASDAQ-2015-011 Amendment No 2 Page 49 of 64
Certain securities including Floating Rate Debt Instruments in which the Fund
will invest will not be able to be priced by pre-established pricing methods Such
securities may be valued by the Trust Board or its delegate at fair value The use of fair
value pricing by the Fund will be governed by the Valuation Procedures and conducted in
accordance with the provisions of the 1940 Act Valuing the Fundrsquos securities using fair
value pricing will result in using prices for those securities that may differ from current
market valuations or official closing prices on the applicable exchange
Availability of Information
The Fundrsquos website (wwwftportfolioscom) which will be publicly available
prior to the public offering of Shares will include a form of the prospectus for the Fund
that may be downloaded The website will include the Sharesrsquo ticker CUSIP and
exchange information along with additional quantitative information updated on a daily
basis including for the Fund (1) daily trading volume the prior business dayrsquos reported
NAV and closing price mid-point of the bidask spread at the time of calculation of such
NAV (the ldquoBidAsk Pricerdquo)33 and a calculation of the premium and discount of the
BidAsk Price against the NAV and (2) data in chart format displaying the frequency
distribution of discounts and premiums of the daily BidAsk Price against the NAV
within appropriate ranges for each of the four previous calendar quarters On each
business day before commencement of trading in Shares in the Regular Market Session34
33 The BidAsk Price of the Fund will be determined using the mid-point of the highest bid and the lowest offer on the Exchange as of the time of calculation of the Fundrsquos NAV The records relating to BidAsk Prices will be retained by the Fund and its service providers
34 See Nasdaq Rule 4120(b)(4) (describing the three trading sessions on the Exchange (1) Pre-Market Session from 4 am to 930 am Eastern Time (2)
SR-NASDAQ-2015-011 Amendment No 2 Page 50 of 64
on the Exchange the Fund will disclose on its website the identities and quantities of the
portfolio of securities and other assets (the ldquoDisclosed Portfoliordquo as defined in Nasdaq
Rule 5735(c)(2)) held by the Fund that will form the basis for the Fundrsquos calculation of
NAV at the end of the business day 35 The Fundrsquos disclosure of derivative positions in
the Disclosed Portfolio will include information that market participants can use to value
these positions intraday On a daily basis the Fund will disclose on the Fundrsquos website
the following information regarding each portfolio holding as applicable to the type of
holding ticker symbol CUSIP number or other identifier if any a description of the
holding (including the type of holding) the identity of the security or other asset or
instrument underlying the holding if any for options the option strike price quantity
held (as measured by for example par value notional value or number of shares
contracts or units) maturity date if any coupon rate if any effective date if any market
value of the holding and percentage weighting of the holding in the Fundrsquos portfolio
The website information will be publicly available at no charge
In addition for the Fund an estimated value defined in Rule 5735(c)(3) as the
ldquoIntraday Indicative Valuerdquo that reflects an estimated intraday value of the Fundrsquos
Disclosed Portfolio will be disseminated Moreover the Intraday Indicative Value
Regular Market Session from 930 am to 4 pm or 415 pm Eastern Time and (3) Post-Market Session from 4 pm or 415 pm to 8 pm Eastern Time)
Under accounting procedures to be followed by the Fund trades made on the prior business day (ldquoTrdquo) will be booked and reflected in NAV on the current business day (ldquoT+1rdquo) Accordingly the Fund will be able to disclose at the beginning of the business day the portfolio that will form the basis for the NAV calculation at the end of the business day
35
SR-NASDAQ-2015-011 Amendment No 2 Page 51 of 64
available on the NASDAQ OMX Information LLC proprietary index data service36 will
be based upon the current value for the components of the Disclosed Portfolio and will be
updated and widely disseminated by one or more major market data vendors and broadly
displayed at least every 15 seconds during the Regular Market Session The Intraday
Indicative Value will be based on quotes and closing prices from the securitiesrsquo local
market and may not reflect events that occur subsequent to the local marketrsquos close
Premiums and discounts between the Intraday Indicative Value and the market price may
occur This should not be viewed as a ldquoreal timerdquo update of the NAV per Share of the
Fund which is calculated only once a day
The dissemination of the Intraday Indicative Value together with the Disclosed
Portfolio will allow investors to determine the value of the underlying portfolio of the
Fund on a daily basis and will provide a close estimate of that value throughout the
trading day
Investors will also be able to obtain the Fundrsquos Statement of Additional
Information (ldquoSAIrdquo) the Fundrsquos annual and semi-annual reports (together ldquoShareholder
Reportsrdquo) and its Form N-CSR and Form N-SAR filed twice a year The Fundrsquos SAI
and Shareholder Reports will be available free upon request from the Fund and those
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or
downloaded from the Commissionrsquos website at wwwsecgov Information regarding
Currently the NASDAQ OMX Global Index Data Service (ldquoGIDSrdquo) is the NASDAQ OMX global index data feed service offering real-time updates daily summary messages and access to widely followed indexes and Intraday Indicative Values for ETFs GIDS provides investment professionals with the daily information needed to track or trade NASDAQ OMX indexes listed ETFs or third-party partner indexes and ETFs
36
SR-NASDAQ-2015-011 Amendment No 2 Page 52 of 64
market price and trading volume of the Shares will be continually available on a real-time
basis throughout the day on brokersrsquo computer screens and other electronic services
Information regarding the previous dayrsquos closing price and trading volume information
for the Shares will be published daily in the financial section of newspapers Quotation
and last sale information for the Shares will be available via Nasdaq proprietary quote
and trade services as well as in accordance with the Unlisted Trading Privileges and the
Consolidated Tape Association (ldquoCTArdquo) plans for the Shares Quotation and last sale
information for the other ETFs in which the Fund will invest will be available via the
quote and trade services of their respective primary exchanges as well as in accordance
with the Unlisted Trading Privileges and the CTA plans as applicable Quotation and
last sale information for US exchange-traded options will be available via the Options
Price Reporting Authority Intraday executable price quotations on Floating Rate Debt
Instruments and other assets not traded on an exchange will be available from major
broker-dealer firms or market data vendors as well as from automated quotation systems
published or other public sources or online information services Additionally the Trade
Reporting and Compliance Engine (ldquoTRACErdquo) of the Financial Industry Regulatory
Authority (ldquoFINRArdquo) will be a source of price information for corporate bonds
privately-issued securities mortgage-backed securities and asset-backed securities to the
extent transactions in such securities are reported to TRACE37 For exchange-traded
Broker-dealers that are FINRA member firms have an obligation to report transactions in specified debt securities to TRACE to the extent required under applicable FINRA rules Generally such debt securities will have at issuance a maturity that exceeds one calendar year
37
SR-NASDAQ-2015-011 Amendment No 2 Page 53 of 64
assets intraday pricing information will be available directly from the applicable listing
exchange
Additional information regarding the Fund and the Shares including investment
strategies risks creation and redemption procedures fees Fund holdings disclosure
policies distributions and taxes will be included in the Registration Statement
Initial and Continued Listing
The Shares will be subject to Rule 5735 which sets forth the initial and continued
listing criteria applicable to Managed Fund Shares The Exchange represents that for
initial andor continued listing the Fund must be in compliance with Rule 10A-338 under
the Act A minimum of 100000 Shares will be outstanding at the commencement of
trading on the Exchange The Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the NAV and the
Disclosed Portfolio will be made available to all market participants at the same time
Trading Halts
With respect to trading halts the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading in the Shares of the Fund Nasdaq will
halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12) Trading may be
halted because of market conditions or for reasons that in the view of the Exchange
make trading in the Shares inadvisable These may include (1) the extent to which
trading is not occurring in the securities andor the other assets constituting the Disclosed
Portfolio of the Fund or (2) whether other unusual conditions or circumstances
See 17 CFR 24010A-3 38
SR-NASDAQ-2015-011 Amendment No 2 Page 54 of 64
detrimental to the maintenance of a fair and orderly market are present Trading in the
Shares also will be subject to Rule 5735(d)(2)(D) which sets forth circumstances under
which Shares of the Fund may be halted
Trading Rules
Nasdaq deems the Shares to be equity securities thus rendering trading in the
Shares subject to Nasdaqrsquos existing rules governing the trading of equity securities
Nasdaq will allow trading in the Shares from 400 am until 800 pm Eastern Time
The Exchange has appropriate rules to facilitate transactions in the Shares during all
trading sessions As provided in Nasdaq Rule 5735(b)(3) the minimum price variation
for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $001
Surveillance
The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws39 The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities laws
The surveillances referred to above generally focus on detecting securities trading
outside their normal patterns which could be indicative of manipulative or other violative
activity When such situations are detected surveillance analysis follows and
FINRA surveils trading on the Exchange pursuant to a regulatory services agreement The Exchange is responsible for FINRArsquos performance under this regulatory services agreement
39
SR-NASDAQ-2015-011 Amendment No 2 Page 55 of 64
investigations are opened where appropriate to review the behavior of all relevant
parties for all relevant trading violations
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 56 of 64
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
SR-NASDAQ-2015-011 Amendment No 2 Page 57 of 64
2 Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
SR-NASDAQ-2015-011 Amendment No 2 Page 58 of 64
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
SR-NASDAQ-2015-011 Amendment No 2 Page 59 of 64
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
SR-NASDAQ-2015-011 Amendment No 2 Page 60 of 64
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 61 of 64
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
SR-NASDAQ-2015-011 Amendment No 2 Page 62 of 64
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
B Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
C Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received From Members Participants or Others
Written comments were neither solicited nor received
III Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Within 45 days of the date of publication of this notice in the Federal Register or
within such longer period (i) as the Commission may designate up to 90 days of such date
if it finds such longer period to be appropriate and publishes its reasons for so finding or
(ii) as to which the Exchange consents the Commission shall (a) by order approve or
disapprove such proposed rule change or (b) institute proceedings to determine whether
the proposed rule change should be disapproved
SR-NASDAQ-2015-011 Amendment No 2 Page 63 of 64
IV Solicitation of Comments
Interested persons are invited to submit written data views and arguments
concerning the foregoing including whether the proposed rule change is consistent with
the Act Comments may be submitted by any of the following methods
Electronic comments
bull Use the Commissionrsquos Internet comment form
(httpwwwsecgovrulessroshtml) or
bull Send an e-mail to rule-commentssecgov Please include File Number
SR-NASDAQ-2015-011 on the subject line
Paper comments
bull Send paper comments in triplicate to Brent J Fields Secretary Securities and
Exchange Commission Station Place 100 F Street NE Washington DC
20549-9303
All submissions should refer to File Number SR-NASDAQ-2015-011 This file number
should be included on the subject line if e-mail is used To help the Commission process
and review your comments more efficiently please use only one method The
Commission will post all comments on the Commissionrsquos Internet website
httpwwwsecgovrulessroshtml
Copies of the submission all subsequent amendments all written statements with
respect to the proposed rule change that are filed with the Commission and all written
communications relating to the proposed rule change between the Commission and any
person other than those that may be withheld from the public in accordance with the
provisions of 5 USC 552 will be available for website viewing and printing in the
Commissionrsquos Public Reference Room 100 F Street NE Washington DC 20549 on
SR-NASDAQ-2015-011 Amendment No 2 Page 64 of 64
official business days between the hours of 1000 am and 300 pm Copies of the filing
also will be available for inspection and copying at the principal office of Nasdaq All
comments received will be posted without change the Commission does not edit
personal identifying information from submissions You should submit only information
that you wish to make available publicly
All submissions should refer to File Number SR-NASDAQ-2015-011 and should
be submitted on or before [insert date 21 days from publication in the Federal Register]
For the Commission by the Division of Trading and Markets pursuant to
delegated authority41
Kevin M OrsquoNeill Deputy Secretary
17 CFR 20030-3(a)(12) 41
SR-NASDAQ-2015-011 Amendment No 2 Page 40 of 64
At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade To be considered
ldquoinvestment graderdquo under normal market conditions rated Floating Rate Debt
Instruments will carry at the time of purchase a rating in the highest four rating
categories of at least one nationally recognized statistical ratings organization
(ldquoNRSROrdquo) (eg BBB- or higher by Standard amp Poorrsquos Ratings Services (ldquoSampPrdquo)
andor Fitch Ratings (ldquoFitchrdquo) or Baa3 or higher by Moodyrsquos Investors Service Inc
(ldquoMoodyrsquosrdquo)18 For unrated securities to be considered ldquoinvestment graderdquo under normal
market conditions such securities will be determined at the time of purchase to be of
comparable quality19 by the Adviser The Fund may invest up to 35 of its net assets in
securities that are at the time of investment rated below investment grade by each
NRSRO rating such securities (or securities that are unrated and determined by the
17 The liquidity of a security especially in the case of asset-backed and mortgage-backed securities will be a substantial factor in the Fundrsquos security selection process Consistent with the discussion below under ldquoInvestment Restrictionsrdquo the Fund will not purchase any Floating Rate Debt Instruments (including asset-backed securities and mortgage-backed securities) that in the Adviserrsquos opinion are illiquid if as a result more than 15 of the value of the Fundrsquos net assets will be invested in illiquid assets
18 For the avoidance of doubt if a security is rated by multiple NRSROs and receives different ratings the Fund will treat the security as being rated in the highest rating category received from an NRSRO
19 Comparable quality of unrated securities will be determined by the Adviser based on fundamental credit analysis of the unrated security and comparable NRSRO-rated securities On a best efforts basis the Adviser will attempt to make a rating determination based on publicly available data In making a ldquocomparable qualityrdquo determination the Adviser may consider for example whether the issuer of the security has issued other rated securities the nature and provisions of the relevant security whether the obligations under the relevant security are guaranteed by another entity and the rating of such guarantor (if any) relevant cash flows macroeconomic analysis andor sector or industry analysis
SR-NASDAQ-2015-011 Amendment No 2 Page 41 of 64
Adviser to be of comparable quality) commonly referred to as ldquohigh yieldrdquo or ldquojunkrdquo
bonds If subsequent to purchase by the Fund a security held by the Fund experiences a
decline in credit quality and falls below investment grade the Fund may continue to hold
the security and it will not cause the Fund to violate the 35 investment limitation
however the security will be taken into account for purposes of determining whether
purchases of additional securities will cause the Fund to violate such limitation
The Fund will limit its investments in asset-backed securities (excluding agency
mortgage-backed securities) and non-agency mortgage-backed securities (in the
aggregate) to 20 of its net assets20 In addition the Fund will limit its investments in
junior loans to 20 of its net assets
The Fund will hold debt securities (including in the aggregate Floating Rate
Debt Instruments and the fixed-rate debt securities described below) of at least 13
non-affiliated issuers
Other Investments
Under normal market conditions the Fund will invest primarily in the Floating
Rate Debt Instruments described above to meet its investment objective In addition the
Fund may invest up to 20 of its net assets in the following types of fixed-rate debt
securities corporate21 and government bonds and notes agency securities22 instruments
20 For the avoidance of doubt there is no limitation on the Fundrsquos investments in agency mortgage-backed securities
21 See footnote 10 above
22 See footnote 11 above
SR-NASDAQ-2015-011 Amendment No 2 Page 42 of 64
of non-US issuers in developed markets privately-issued securities 23 asset-backed
securities 24 mortgage-backed securities 25 municipal bonds money market securities26
and investment companies27 (including investment companies advised by the Adviser)
that invest primarily in the foregoing types of debt securities
Further to pursue its investment objective the Fund may invest up to 20 of the
value of its net assets in exchange-listed options on US Treasury futures contracts and
exchange-listed US Treasury futures contracts28 The use of these derivative
transactions may allow the Fund to obtain net long or short exposures to selected interest
rates These derivatives may also be used to hedge risks including interest rate risks and
credit risks associated with the Fundrsquos portfolio investments The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
23 See footnote 12 above
24 See footnote 13 above
25 See footnote 14 above
26 ldquoMoney market securitiesrdquo for these purposes generally includes short-term high-quality obligations issued or guaranteed by the US Treasury or the agencies or instrumentalities of the US government short-term high-quality securities issued or guaranteed by non-US governments agencies and instrumentalities repurchase agreements commercial paper (both asset-backed and non-assetshybacked) and deposits and other obligations of US and non-US banks and financial institutions
27 See footnote 16 above
28 At least 90 of the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be invested in instruments that trade in markets that are members of the Intermarket Surveillance Group (ldquoISGrdquo) (see footnote 40 below) or are parties to a comprehensive surveillance sharing agreement with the Exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 43 of 64
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index
Investment Restrictions
The Fund will not invest 25 or more of the value of its total assets in securities
of issuers in any one industry This restriction does not apply to (a) obligations issued or
guaranteed by the US government its agencies or instrumentalities or (b) securities of
other investment companies29
The Fund may hold up to an aggregate amount of 15 of its net assets in illiquid
assets (calculated at the time of investment) including Rule 144A securities deemed
illiquid by the Adviser30 The Fund will monitor its portfolio liquidity on an ongoing
basis to determine whether in light of current circumstances an adequate level of
liquidity is being maintained and will consider taking appropriate steps in order to
maintain adequate liquidity if through a change in values net assets or other
circumstances more than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid
assets include securities subject to contractual or other restrictions on resale and other
29 See Form N-1A Item 9 The Commission has taken the position that a fund is concentrated if it invests more than 25 of the value of its total assets in any one industry See eg Investment Company Act Release No 9011 (October 30 1975) 40 FR 54241 (November 21 1975)
30 In reaching liquidity decisions the Adviser may consider the following factors the frequency of trades and quotes for the security the number of dealers wishing to purchase or sell the security and the number of other potential purchasers dealer undertakings to make a market in the security and the nature of the security and the nature of the marketplace in which it trades (eg the time needed to dispose of the security the method of soliciting offers and the mechanics of transfer)
SR-NASDAQ-2015-011 Amendment No 2 Page 44 of 64
instruments that lack readily available markets as determined in accordance with
Commission staff guidance31
The Fund will not invest in non-US equity securities
Creation and Redemption of Shares
The Fund will issue and redeem Shares on a continuous basis at net asset value
(ldquoNAVrdquo)32 only in large blocks of Shares (ldquoCreation Unitsrdquo) in transactions with
authorized participants generally including broker-dealers and large institutional
investors (ldquoAuthorized Participantsrdquo) Creation Units generally will consist of 50000
Shares although this may change from time to time Creation Units however are not
expected to consist of less than 50000 Shares As described in the Registration
Statement and consistent with the Exemptive Relief the Fund will issue and redeem
Creation Units in exchange for an in-kind portfolio of instruments andor cash in lieu of
31 The Commission has stated that long-standing Commission guidelines have required open-end funds to hold no more than 15 of their net assets in illiquid securities and other illiquid assets See Investment Company Act Release No 28193 (March 11 2008) 73 FR 14618 (March 18 2008) footnote 34 See also Investment Company Act Release No 5847 (October 21 1969) 35 FR 19989 (December 31 1970) (Statement Regarding ldquoRestricted Securitiesrdquo) Investment Company Act Release No 18612 (March 12 1992) 57 FR 9828 (March 20 1992) (Revisions of Guidelines to Form N-1A) A fundrsquos portfolio security is illiquid if it cannot be disposed of in the ordinary course of business within seven days at approximately the value ascribed to it by the fund See Investment Company Act Release No 14983 (March 12 1986) 51 FR 9773 (March 21 1986) (adopting amendments to Rule 2a-7 under the 1940 Act) Investment Company Act Release No 17452 (April 23 1990) 55 FR 17933 (April 30 1990) (adopting Rule 144A under the Securities Act of 1933)
32 The NAV of the Fundrsquos Shares generally will be calculated once daily Monday through Friday as of the close of regular trading on the New York Stock Exchange generally 400 pm Eastern Time (the ldquoNAV Calculation Timerdquo) NAV per Share will be calculated by dividing the Fundrsquos net assets by the number of Fund Shares outstanding For more information regarding the valuation of Fund investments in calculating the Fundrsquos NAV see the Registration Statement
SR-NASDAQ-2015-011 Amendment No 2 Page 45 of 64
such instruments (the ldquoCreation Basketrdquo) In addition if there is a difference between the
NAV attributable to a Creation Unit and the market value of the Creation Basket
exchanged for the Creation Unit the party conveying instruments with the lower value
will pay to the other an amount in cash equal to the difference (referred to as the ldquoCash
Componentrdquo)
Creations and redemptions must be made by or through an Authorized Participant
that has executed an agreement that has been agreed to by the Distributor and BNY with
respect to creations and redemptions of Creation Units All standard orders to create
Creation Units must be received by the transfer agent no later than the closing time of the
regular trading session on the New York Stock Exchange (ordinarily 400 pm Eastern
Time) (the ldquoClosing Timerdquo) in each case on the date such order is placed in order for the
creation of Creation Units to be effected based on the NAV of Shares as next determined
on such date after receipt of the order in proper form Shares may be redeemed only in
Creation Units at their NAV next determined after receipt not later than the Closing Time
of a redemption request in proper form by the Fund through the transfer agent and only
on a business day
The Fundrsquos custodian through the National Securities Clearing Corporation will
make available on each business day prior to the opening of business of the Exchange
the list of the names and quantities of the instruments comprising the Creation Basket as
well as the estimated Cash Component (if any) for that day The published Creation
Basket will apply until a new Creation Basket is announced on the following business
day prior to commencement of trading in the Shares
SR-NASDAQ-2015-011 Amendment No 2 Page 46 of 64
Net Asset Value
The Fundrsquos NAV will be determined as of the close of trading (normally
400 pm Eastern Time) on each day the New York Stock Exchange is open for
business NAV will be calculated for the Fund by taking the market price of the Fundrsquos
total assets including interest or dividends accrued but not yet collected less all
liabilities and dividing such amount by the total number of Shares outstanding The
result rounded to the nearest cent will be the NAV per Share All valuations will be
subject to review by the Board of Trustees of the Trust (ldquoTrust Boardrdquo) or its delegate
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with valuation procedures (which may be revised from time to time) adopted by the Trust
Board (the ldquoValuation Proceduresrdquo) and in accordance with the 1940 Act A market
valuation generally means a valuation (i) obtained from an exchange an independent
pricing service (ldquoPricing Servicerdquo) or a major market maker (or dealer) or (ii) based on a
price quotation or other equivalent indication of value supplied by an exchange a Pricing
Service or a major market maker (or dealer) The information summarized below is
based on the Valuation Procedures as currently in effect however as noted above the
Valuation Procedures are amended from time to time and therefore such information is
subject to change
Certain securities including Floating Rate Debt Instruments in which the Fund
may invest will not be listed on any securities exchange or board of trade Such
securities will typically be bought and sold by institutional investors in individually
negotiated private transactions that function in many respects like an over-the-counter
SR-NASDAQ-2015-011 Amendment No 2 Page 47 of 64
secondary market although typically no formal market makers will exist Certain
securities particularly debt securities will have few or no trades or trade infrequently
and information regarding a specific security may not be widely available or may be
incomplete Accordingly determinations of the fair value of debt securities may be
based on infrequent and dated information Because there is less reliable objective data
available elements of judgment may play a greater role in valuation of debt securities
than for other types of securities Typically Floating Rate Debt Instruments and other
debt securities in which the Fund may invest (other than those described below) will be
valued using information provided by a Pricing Service Debt securities having a
remaining maturity of 60 days or less when purchased will be valued at cost adjusted for
amortization of premiums and accretion of discounts provided the Adviserrsquos pricing
committee (the ldquoPricing Committeerdquo) has determined that the use of amortized cost is an
appropriate reflection of fair value given market and issuer-specific conditions existing at
the time of the determination Overnight repurchase agreements will be valued at cost
and term repurchase agreements (ie those whose maturity exceeds seven days) will be
valued at the average of the bid quotations obtained daily from at least two recognized
dealers
Asset-backed and mortgage-backed securities will generally be valued by using a
Pricing Service If a Pricing Service does not cover a particular asset-backed or
mortgage-backed security or discontinues covering a particular asset-backed or
mortgage-backed security the security will be priced using broker quotes generally
provided by brokers that make or participate in markets in the security To derive values
Pricing Services and broker-dealers may use matrix pricing and valuation models as well
SR-NASDAQ-2015-011 Amendment No 2 Page 48 of 64
as recent market transactions for the same or similar assets As it deems appropriate the
Pricing Committee may determine that a Pricing Service price does not represent an
accurate value of an asset-backed or mortgage-backed security based on broker quotes it
receives a recent trade in the security by the Fund information from a portfolio manager
or other market information In the event that the Pricing Committee determines that the
Pricing Service price is unreliable or inaccurate based on such other information broker
quotes may be used Additionally if the Pricing Committee determines that the price of
an asset-backed or mortgage-backed security obtained from a Pricing Service and
available broker quotes is unreliable or inaccurate due to market conditions or other
reasons or if a Pricing Service price or broker quote is unavailable the security will be
valued using fair value pricing as described below
Equity securities listed on any exchange other than the Exchange will be valued at
the last sale price on the exchange on which they are principally traded on the business
day as of which such value is being determined Equity securities listed on the Exchange
will be valued at the official closing price on the business day as of which such value is
being determined If there has been no sale on such day or no official closing price in
the case of securities traded on the Exchange the securities will be valued using fair
value pricing as described below Equity securities traded on more than one securities
exchange will be valued at the last sale price or official closing price as applicable on
the business day as of which such value is being determined at the close of the exchange
representing the principal market for such securities
Exchange-traded options and futures contracts will be valued at the closing price
in the market where such contracts are principally traded
SR-NASDAQ-2015-011 Amendment No 2 Page 49 of 64
Certain securities including Floating Rate Debt Instruments in which the Fund
will invest will not be able to be priced by pre-established pricing methods Such
securities may be valued by the Trust Board or its delegate at fair value The use of fair
value pricing by the Fund will be governed by the Valuation Procedures and conducted in
accordance with the provisions of the 1940 Act Valuing the Fundrsquos securities using fair
value pricing will result in using prices for those securities that may differ from current
market valuations or official closing prices on the applicable exchange
Availability of Information
The Fundrsquos website (wwwftportfolioscom) which will be publicly available
prior to the public offering of Shares will include a form of the prospectus for the Fund
that may be downloaded The website will include the Sharesrsquo ticker CUSIP and
exchange information along with additional quantitative information updated on a daily
basis including for the Fund (1) daily trading volume the prior business dayrsquos reported
NAV and closing price mid-point of the bidask spread at the time of calculation of such
NAV (the ldquoBidAsk Pricerdquo)33 and a calculation of the premium and discount of the
BidAsk Price against the NAV and (2) data in chart format displaying the frequency
distribution of discounts and premiums of the daily BidAsk Price against the NAV
within appropriate ranges for each of the four previous calendar quarters On each
business day before commencement of trading in Shares in the Regular Market Session34
33 The BidAsk Price of the Fund will be determined using the mid-point of the highest bid and the lowest offer on the Exchange as of the time of calculation of the Fundrsquos NAV The records relating to BidAsk Prices will be retained by the Fund and its service providers
34 See Nasdaq Rule 4120(b)(4) (describing the three trading sessions on the Exchange (1) Pre-Market Session from 4 am to 930 am Eastern Time (2)
SR-NASDAQ-2015-011 Amendment No 2 Page 50 of 64
on the Exchange the Fund will disclose on its website the identities and quantities of the
portfolio of securities and other assets (the ldquoDisclosed Portfoliordquo as defined in Nasdaq
Rule 5735(c)(2)) held by the Fund that will form the basis for the Fundrsquos calculation of
NAV at the end of the business day 35 The Fundrsquos disclosure of derivative positions in
the Disclosed Portfolio will include information that market participants can use to value
these positions intraday On a daily basis the Fund will disclose on the Fundrsquos website
the following information regarding each portfolio holding as applicable to the type of
holding ticker symbol CUSIP number or other identifier if any a description of the
holding (including the type of holding) the identity of the security or other asset or
instrument underlying the holding if any for options the option strike price quantity
held (as measured by for example par value notional value or number of shares
contracts or units) maturity date if any coupon rate if any effective date if any market
value of the holding and percentage weighting of the holding in the Fundrsquos portfolio
The website information will be publicly available at no charge
In addition for the Fund an estimated value defined in Rule 5735(c)(3) as the
ldquoIntraday Indicative Valuerdquo that reflects an estimated intraday value of the Fundrsquos
Disclosed Portfolio will be disseminated Moreover the Intraday Indicative Value
Regular Market Session from 930 am to 4 pm or 415 pm Eastern Time and (3) Post-Market Session from 4 pm or 415 pm to 8 pm Eastern Time)
Under accounting procedures to be followed by the Fund trades made on the prior business day (ldquoTrdquo) will be booked and reflected in NAV on the current business day (ldquoT+1rdquo) Accordingly the Fund will be able to disclose at the beginning of the business day the portfolio that will form the basis for the NAV calculation at the end of the business day
35
SR-NASDAQ-2015-011 Amendment No 2 Page 51 of 64
available on the NASDAQ OMX Information LLC proprietary index data service36 will
be based upon the current value for the components of the Disclosed Portfolio and will be
updated and widely disseminated by one or more major market data vendors and broadly
displayed at least every 15 seconds during the Regular Market Session The Intraday
Indicative Value will be based on quotes and closing prices from the securitiesrsquo local
market and may not reflect events that occur subsequent to the local marketrsquos close
Premiums and discounts between the Intraday Indicative Value and the market price may
occur This should not be viewed as a ldquoreal timerdquo update of the NAV per Share of the
Fund which is calculated only once a day
The dissemination of the Intraday Indicative Value together with the Disclosed
Portfolio will allow investors to determine the value of the underlying portfolio of the
Fund on a daily basis and will provide a close estimate of that value throughout the
trading day
Investors will also be able to obtain the Fundrsquos Statement of Additional
Information (ldquoSAIrdquo) the Fundrsquos annual and semi-annual reports (together ldquoShareholder
Reportsrdquo) and its Form N-CSR and Form N-SAR filed twice a year The Fundrsquos SAI
and Shareholder Reports will be available free upon request from the Fund and those
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or
downloaded from the Commissionrsquos website at wwwsecgov Information regarding
Currently the NASDAQ OMX Global Index Data Service (ldquoGIDSrdquo) is the NASDAQ OMX global index data feed service offering real-time updates daily summary messages and access to widely followed indexes and Intraday Indicative Values for ETFs GIDS provides investment professionals with the daily information needed to track or trade NASDAQ OMX indexes listed ETFs or third-party partner indexes and ETFs
36
SR-NASDAQ-2015-011 Amendment No 2 Page 52 of 64
market price and trading volume of the Shares will be continually available on a real-time
basis throughout the day on brokersrsquo computer screens and other electronic services
Information regarding the previous dayrsquos closing price and trading volume information
for the Shares will be published daily in the financial section of newspapers Quotation
and last sale information for the Shares will be available via Nasdaq proprietary quote
and trade services as well as in accordance with the Unlisted Trading Privileges and the
Consolidated Tape Association (ldquoCTArdquo) plans for the Shares Quotation and last sale
information for the other ETFs in which the Fund will invest will be available via the
quote and trade services of their respective primary exchanges as well as in accordance
with the Unlisted Trading Privileges and the CTA plans as applicable Quotation and
last sale information for US exchange-traded options will be available via the Options
Price Reporting Authority Intraday executable price quotations on Floating Rate Debt
Instruments and other assets not traded on an exchange will be available from major
broker-dealer firms or market data vendors as well as from automated quotation systems
published or other public sources or online information services Additionally the Trade
Reporting and Compliance Engine (ldquoTRACErdquo) of the Financial Industry Regulatory
Authority (ldquoFINRArdquo) will be a source of price information for corporate bonds
privately-issued securities mortgage-backed securities and asset-backed securities to the
extent transactions in such securities are reported to TRACE37 For exchange-traded
Broker-dealers that are FINRA member firms have an obligation to report transactions in specified debt securities to TRACE to the extent required under applicable FINRA rules Generally such debt securities will have at issuance a maturity that exceeds one calendar year
37
SR-NASDAQ-2015-011 Amendment No 2 Page 53 of 64
assets intraday pricing information will be available directly from the applicable listing
exchange
Additional information regarding the Fund and the Shares including investment
strategies risks creation and redemption procedures fees Fund holdings disclosure
policies distributions and taxes will be included in the Registration Statement
Initial and Continued Listing
The Shares will be subject to Rule 5735 which sets forth the initial and continued
listing criteria applicable to Managed Fund Shares The Exchange represents that for
initial andor continued listing the Fund must be in compliance with Rule 10A-338 under
the Act A minimum of 100000 Shares will be outstanding at the commencement of
trading on the Exchange The Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the NAV and the
Disclosed Portfolio will be made available to all market participants at the same time
Trading Halts
With respect to trading halts the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading in the Shares of the Fund Nasdaq will
halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12) Trading may be
halted because of market conditions or for reasons that in the view of the Exchange
make trading in the Shares inadvisable These may include (1) the extent to which
trading is not occurring in the securities andor the other assets constituting the Disclosed
Portfolio of the Fund or (2) whether other unusual conditions or circumstances
See 17 CFR 24010A-3 38
SR-NASDAQ-2015-011 Amendment No 2 Page 54 of 64
detrimental to the maintenance of a fair and orderly market are present Trading in the
Shares also will be subject to Rule 5735(d)(2)(D) which sets forth circumstances under
which Shares of the Fund may be halted
Trading Rules
Nasdaq deems the Shares to be equity securities thus rendering trading in the
Shares subject to Nasdaqrsquos existing rules governing the trading of equity securities
Nasdaq will allow trading in the Shares from 400 am until 800 pm Eastern Time
The Exchange has appropriate rules to facilitate transactions in the Shares during all
trading sessions As provided in Nasdaq Rule 5735(b)(3) the minimum price variation
for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $001
Surveillance
The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws39 The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities laws
The surveillances referred to above generally focus on detecting securities trading
outside their normal patterns which could be indicative of manipulative or other violative
activity When such situations are detected surveillance analysis follows and
FINRA surveils trading on the Exchange pursuant to a regulatory services agreement The Exchange is responsible for FINRArsquos performance under this regulatory services agreement
39
SR-NASDAQ-2015-011 Amendment No 2 Page 55 of 64
investigations are opened where appropriate to review the behavior of all relevant
parties for all relevant trading violations
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 56 of 64
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
SR-NASDAQ-2015-011 Amendment No 2 Page 57 of 64
2 Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
SR-NASDAQ-2015-011 Amendment No 2 Page 58 of 64
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
SR-NASDAQ-2015-011 Amendment No 2 Page 59 of 64
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
SR-NASDAQ-2015-011 Amendment No 2 Page 60 of 64
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 61 of 64
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
SR-NASDAQ-2015-011 Amendment No 2 Page 62 of 64
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
B Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
C Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received From Members Participants or Others
Written comments were neither solicited nor received
III Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Within 45 days of the date of publication of this notice in the Federal Register or
within such longer period (i) as the Commission may designate up to 90 days of such date
if it finds such longer period to be appropriate and publishes its reasons for so finding or
(ii) as to which the Exchange consents the Commission shall (a) by order approve or
disapprove such proposed rule change or (b) institute proceedings to determine whether
the proposed rule change should be disapproved
SR-NASDAQ-2015-011 Amendment No 2 Page 63 of 64
IV Solicitation of Comments
Interested persons are invited to submit written data views and arguments
concerning the foregoing including whether the proposed rule change is consistent with
the Act Comments may be submitted by any of the following methods
Electronic comments
bull Use the Commissionrsquos Internet comment form
(httpwwwsecgovrulessroshtml) or
bull Send an e-mail to rule-commentssecgov Please include File Number
SR-NASDAQ-2015-011 on the subject line
Paper comments
bull Send paper comments in triplicate to Brent J Fields Secretary Securities and
Exchange Commission Station Place 100 F Street NE Washington DC
20549-9303
All submissions should refer to File Number SR-NASDAQ-2015-011 This file number
should be included on the subject line if e-mail is used To help the Commission process
and review your comments more efficiently please use only one method The
Commission will post all comments on the Commissionrsquos Internet website
httpwwwsecgovrulessroshtml
Copies of the submission all subsequent amendments all written statements with
respect to the proposed rule change that are filed with the Commission and all written
communications relating to the proposed rule change between the Commission and any
person other than those that may be withheld from the public in accordance with the
provisions of 5 USC 552 will be available for website viewing and printing in the
Commissionrsquos Public Reference Room 100 F Street NE Washington DC 20549 on
SR-NASDAQ-2015-011 Amendment No 2 Page 64 of 64
official business days between the hours of 1000 am and 300 pm Copies of the filing
also will be available for inspection and copying at the principal office of Nasdaq All
comments received will be posted without change the Commission does not edit
personal identifying information from submissions You should submit only information
that you wish to make available publicly
All submissions should refer to File Number SR-NASDAQ-2015-011 and should
be submitted on or before [insert date 21 days from publication in the Federal Register]
For the Commission by the Division of Trading and Markets pursuant to
delegated authority41
Kevin M OrsquoNeill Deputy Secretary
17 CFR 20030-3(a)(12) 41
SR-NASDAQ-2015-011 Amendment No 2 Page 41 of 64
Adviser to be of comparable quality) commonly referred to as ldquohigh yieldrdquo or ldquojunkrdquo
bonds If subsequent to purchase by the Fund a security held by the Fund experiences a
decline in credit quality and falls below investment grade the Fund may continue to hold
the security and it will not cause the Fund to violate the 35 investment limitation
however the security will be taken into account for purposes of determining whether
purchases of additional securities will cause the Fund to violate such limitation
The Fund will limit its investments in asset-backed securities (excluding agency
mortgage-backed securities) and non-agency mortgage-backed securities (in the
aggregate) to 20 of its net assets20 In addition the Fund will limit its investments in
junior loans to 20 of its net assets
The Fund will hold debt securities (including in the aggregate Floating Rate
Debt Instruments and the fixed-rate debt securities described below) of at least 13
non-affiliated issuers
Other Investments
Under normal market conditions the Fund will invest primarily in the Floating
Rate Debt Instruments described above to meet its investment objective In addition the
Fund may invest up to 20 of its net assets in the following types of fixed-rate debt
securities corporate21 and government bonds and notes agency securities22 instruments
20 For the avoidance of doubt there is no limitation on the Fundrsquos investments in agency mortgage-backed securities
21 See footnote 10 above
22 See footnote 11 above
SR-NASDAQ-2015-011 Amendment No 2 Page 42 of 64
of non-US issuers in developed markets privately-issued securities 23 asset-backed
securities 24 mortgage-backed securities 25 municipal bonds money market securities26
and investment companies27 (including investment companies advised by the Adviser)
that invest primarily in the foregoing types of debt securities
Further to pursue its investment objective the Fund may invest up to 20 of the
value of its net assets in exchange-listed options on US Treasury futures contracts and
exchange-listed US Treasury futures contracts28 The use of these derivative
transactions may allow the Fund to obtain net long or short exposures to selected interest
rates These derivatives may also be used to hedge risks including interest rate risks and
credit risks associated with the Fundrsquos portfolio investments The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
23 See footnote 12 above
24 See footnote 13 above
25 See footnote 14 above
26 ldquoMoney market securitiesrdquo for these purposes generally includes short-term high-quality obligations issued or guaranteed by the US Treasury or the agencies or instrumentalities of the US government short-term high-quality securities issued or guaranteed by non-US governments agencies and instrumentalities repurchase agreements commercial paper (both asset-backed and non-assetshybacked) and deposits and other obligations of US and non-US banks and financial institutions
27 See footnote 16 above
28 At least 90 of the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be invested in instruments that trade in markets that are members of the Intermarket Surveillance Group (ldquoISGrdquo) (see footnote 40 below) or are parties to a comprehensive surveillance sharing agreement with the Exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 43 of 64
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index
Investment Restrictions
The Fund will not invest 25 or more of the value of its total assets in securities
of issuers in any one industry This restriction does not apply to (a) obligations issued or
guaranteed by the US government its agencies or instrumentalities or (b) securities of
other investment companies29
The Fund may hold up to an aggregate amount of 15 of its net assets in illiquid
assets (calculated at the time of investment) including Rule 144A securities deemed
illiquid by the Adviser30 The Fund will monitor its portfolio liquidity on an ongoing
basis to determine whether in light of current circumstances an adequate level of
liquidity is being maintained and will consider taking appropriate steps in order to
maintain adequate liquidity if through a change in values net assets or other
circumstances more than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid
assets include securities subject to contractual or other restrictions on resale and other
29 See Form N-1A Item 9 The Commission has taken the position that a fund is concentrated if it invests more than 25 of the value of its total assets in any one industry See eg Investment Company Act Release No 9011 (October 30 1975) 40 FR 54241 (November 21 1975)
30 In reaching liquidity decisions the Adviser may consider the following factors the frequency of trades and quotes for the security the number of dealers wishing to purchase or sell the security and the number of other potential purchasers dealer undertakings to make a market in the security and the nature of the security and the nature of the marketplace in which it trades (eg the time needed to dispose of the security the method of soliciting offers and the mechanics of transfer)
SR-NASDAQ-2015-011 Amendment No 2 Page 44 of 64
instruments that lack readily available markets as determined in accordance with
Commission staff guidance31
The Fund will not invest in non-US equity securities
Creation and Redemption of Shares
The Fund will issue and redeem Shares on a continuous basis at net asset value
(ldquoNAVrdquo)32 only in large blocks of Shares (ldquoCreation Unitsrdquo) in transactions with
authorized participants generally including broker-dealers and large institutional
investors (ldquoAuthorized Participantsrdquo) Creation Units generally will consist of 50000
Shares although this may change from time to time Creation Units however are not
expected to consist of less than 50000 Shares As described in the Registration
Statement and consistent with the Exemptive Relief the Fund will issue and redeem
Creation Units in exchange for an in-kind portfolio of instruments andor cash in lieu of
31 The Commission has stated that long-standing Commission guidelines have required open-end funds to hold no more than 15 of their net assets in illiquid securities and other illiquid assets See Investment Company Act Release No 28193 (March 11 2008) 73 FR 14618 (March 18 2008) footnote 34 See also Investment Company Act Release No 5847 (October 21 1969) 35 FR 19989 (December 31 1970) (Statement Regarding ldquoRestricted Securitiesrdquo) Investment Company Act Release No 18612 (March 12 1992) 57 FR 9828 (March 20 1992) (Revisions of Guidelines to Form N-1A) A fundrsquos portfolio security is illiquid if it cannot be disposed of in the ordinary course of business within seven days at approximately the value ascribed to it by the fund See Investment Company Act Release No 14983 (March 12 1986) 51 FR 9773 (March 21 1986) (adopting amendments to Rule 2a-7 under the 1940 Act) Investment Company Act Release No 17452 (April 23 1990) 55 FR 17933 (April 30 1990) (adopting Rule 144A under the Securities Act of 1933)
32 The NAV of the Fundrsquos Shares generally will be calculated once daily Monday through Friday as of the close of regular trading on the New York Stock Exchange generally 400 pm Eastern Time (the ldquoNAV Calculation Timerdquo) NAV per Share will be calculated by dividing the Fundrsquos net assets by the number of Fund Shares outstanding For more information regarding the valuation of Fund investments in calculating the Fundrsquos NAV see the Registration Statement
SR-NASDAQ-2015-011 Amendment No 2 Page 45 of 64
such instruments (the ldquoCreation Basketrdquo) In addition if there is a difference between the
NAV attributable to a Creation Unit and the market value of the Creation Basket
exchanged for the Creation Unit the party conveying instruments with the lower value
will pay to the other an amount in cash equal to the difference (referred to as the ldquoCash
Componentrdquo)
Creations and redemptions must be made by or through an Authorized Participant
that has executed an agreement that has been agreed to by the Distributor and BNY with
respect to creations and redemptions of Creation Units All standard orders to create
Creation Units must be received by the transfer agent no later than the closing time of the
regular trading session on the New York Stock Exchange (ordinarily 400 pm Eastern
Time) (the ldquoClosing Timerdquo) in each case on the date such order is placed in order for the
creation of Creation Units to be effected based on the NAV of Shares as next determined
on such date after receipt of the order in proper form Shares may be redeemed only in
Creation Units at their NAV next determined after receipt not later than the Closing Time
of a redemption request in proper form by the Fund through the transfer agent and only
on a business day
The Fundrsquos custodian through the National Securities Clearing Corporation will
make available on each business day prior to the opening of business of the Exchange
the list of the names and quantities of the instruments comprising the Creation Basket as
well as the estimated Cash Component (if any) for that day The published Creation
Basket will apply until a new Creation Basket is announced on the following business
day prior to commencement of trading in the Shares
SR-NASDAQ-2015-011 Amendment No 2 Page 46 of 64
Net Asset Value
The Fundrsquos NAV will be determined as of the close of trading (normally
400 pm Eastern Time) on each day the New York Stock Exchange is open for
business NAV will be calculated for the Fund by taking the market price of the Fundrsquos
total assets including interest or dividends accrued but not yet collected less all
liabilities and dividing such amount by the total number of Shares outstanding The
result rounded to the nearest cent will be the NAV per Share All valuations will be
subject to review by the Board of Trustees of the Trust (ldquoTrust Boardrdquo) or its delegate
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with valuation procedures (which may be revised from time to time) adopted by the Trust
Board (the ldquoValuation Proceduresrdquo) and in accordance with the 1940 Act A market
valuation generally means a valuation (i) obtained from an exchange an independent
pricing service (ldquoPricing Servicerdquo) or a major market maker (or dealer) or (ii) based on a
price quotation or other equivalent indication of value supplied by an exchange a Pricing
Service or a major market maker (or dealer) The information summarized below is
based on the Valuation Procedures as currently in effect however as noted above the
Valuation Procedures are amended from time to time and therefore such information is
subject to change
Certain securities including Floating Rate Debt Instruments in which the Fund
may invest will not be listed on any securities exchange or board of trade Such
securities will typically be bought and sold by institutional investors in individually
negotiated private transactions that function in many respects like an over-the-counter
SR-NASDAQ-2015-011 Amendment No 2 Page 47 of 64
secondary market although typically no formal market makers will exist Certain
securities particularly debt securities will have few or no trades or trade infrequently
and information regarding a specific security may not be widely available or may be
incomplete Accordingly determinations of the fair value of debt securities may be
based on infrequent and dated information Because there is less reliable objective data
available elements of judgment may play a greater role in valuation of debt securities
than for other types of securities Typically Floating Rate Debt Instruments and other
debt securities in which the Fund may invest (other than those described below) will be
valued using information provided by a Pricing Service Debt securities having a
remaining maturity of 60 days or less when purchased will be valued at cost adjusted for
amortization of premiums and accretion of discounts provided the Adviserrsquos pricing
committee (the ldquoPricing Committeerdquo) has determined that the use of amortized cost is an
appropriate reflection of fair value given market and issuer-specific conditions existing at
the time of the determination Overnight repurchase agreements will be valued at cost
and term repurchase agreements (ie those whose maturity exceeds seven days) will be
valued at the average of the bid quotations obtained daily from at least two recognized
dealers
Asset-backed and mortgage-backed securities will generally be valued by using a
Pricing Service If a Pricing Service does not cover a particular asset-backed or
mortgage-backed security or discontinues covering a particular asset-backed or
mortgage-backed security the security will be priced using broker quotes generally
provided by brokers that make or participate in markets in the security To derive values
Pricing Services and broker-dealers may use matrix pricing and valuation models as well
SR-NASDAQ-2015-011 Amendment No 2 Page 48 of 64
as recent market transactions for the same or similar assets As it deems appropriate the
Pricing Committee may determine that a Pricing Service price does not represent an
accurate value of an asset-backed or mortgage-backed security based on broker quotes it
receives a recent trade in the security by the Fund information from a portfolio manager
or other market information In the event that the Pricing Committee determines that the
Pricing Service price is unreliable or inaccurate based on such other information broker
quotes may be used Additionally if the Pricing Committee determines that the price of
an asset-backed or mortgage-backed security obtained from a Pricing Service and
available broker quotes is unreliable or inaccurate due to market conditions or other
reasons or if a Pricing Service price or broker quote is unavailable the security will be
valued using fair value pricing as described below
Equity securities listed on any exchange other than the Exchange will be valued at
the last sale price on the exchange on which they are principally traded on the business
day as of which such value is being determined Equity securities listed on the Exchange
will be valued at the official closing price on the business day as of which such value is
being determined If there has been no sale on such day or no official closing price in
the case of securities traded on the Exchange the securities will be valued using fair
value pricing as described below Equity securities traded on more than one securities
exchange will be valued at the last sale price or official closing price as applicable on
the business day as of which such value is being determined at the close of the exchange
representing the principal market for such securities
Exchange-traded options and futures contracts will be valued at the closing price
in the market where such contracts are principally traded
SR-NASDAQ-2015-011 Amendment No 2 Page 49 of 64
Certain securities including Floating Rate Debt Instruments in which the Fund
will invest will not be able to be priced by pre-established pricing methods Such
securities may be valued by the Trust Board or its delegate at fair value The use of fair
value pricing by the Fund will be governed by the Valuation Procedures and conducted in
accordance with the provisions of the 1940 Act Valuing the Fundrsquos securities using fair
value pricing will result in using prices for those securities that may differ from current
market valuations or official closing prices on the applicable exchange
Availability of Information
The Fundrsquos website (wwwftportfolioscom) which will be publicly available
prior to the public offering of Shares will include a form of the prospectus for the Fund
that may be downloaded The website will include the Sharesrsquo ticker CUSIP and
exchange information along with additional quantitative information updated on a daily
basis including for the Fund (1) daily trading volume the prior business dayrsquos reported
NAV and closing price mid-point of the bidask spread at the time of calculation of such
NAV (the ldquoBidAsk Pricerdquo)33 and a calculation of the premium and discount of the
BidAsk Price against the NAV and (2) data in chart format displaying the frequency
distribution of discounts and premiums of the daily BidAsk Price against the NAV
within appropriate ranges for each of the four previous calendar quarters On each
business day before commencement of trading in Shares in the Regular Market Session34
33 The BidAsk Price of the Fund will be determined using the mid-point of the highest bid and the lowest offer on the Exchange as of the time of calculation of the Fundrsquos NAV The records relating to BidAsk Prices will be retained by the Fund and its service providers
34 See Nasdaq Rule 4120(b)(4) (describing the three trading sessions on the Exchange (1) Pre-Market Session from 4 am to 930 am Eastern Time (2)
SR-NASDAQ-2015-011 Amendment No 2 Page 50 of 64
on the Exchange the Fund will disclose on its website the identities and quantities of the
portfolio of securities and other assets (the ldquoDisclosed Portfoliordquo as defined in Nasdaq
Rule 5735(c)(2)) held by the Fund that will form the basis for the Fundrsquos calculation of
NAV at the end of the business day 35 The Fundrsquos disclosure of derivative positions in
the Disclosed Portfolio will include information that market participants can use to value
these positions intraday On a daily basis the Fund will disclose on the Fundrsquos website
the following information regarding each portfolio holding as applicable to the type of
holding ticker symbol CUSIP number or other identifier if any a description of the
holding (including the type of holding) the identity of the security or other asset or
instrument underlying the holding if any for options the option strike price quantity
held (as measured by for example par value notional value or number of shares
contracts or units) maturity date if any coupon rate if any effective date if any market
value of the holding and percentage weighting of the holding in the Fundrsquos portfolio
The website information will be publicly available at no charge
In addition for the Fund an estimated value defined in Rule 5735(c)(3) as the
ldquoIntraday Indicative Valuerdquo that reflects an estimated intraday value of the Fundrsquos
Disclosed Portfolio will be disseminated Moreover the Intraday Indicative Value
Regular Market Session from 930 am to 4 pm or 415 pm Eastern Time and (3) Post-Market Session from 4 pm or 415 pm to 8 pm Eastern Time)
Under accounting procedures to be followed by the Fund trades made on the prior business day (ldquoTrdquo) will be booked and reflected in NAV on the current business day (ldquoT+1rdquo) Accordingly the Fund will be able to disclose at the beginning of the business day the portfolio that will form the basis for the NAV calculation at the end of the business day
35
SR-NASDAQ-2015-011 Amendment No 2 Page 51 of 64
available on the NASDAQ OMX Information LLC proprietary index data service36 will
be based upon the current value for the components of the Disclosed Portfolio and will be
updated and widely disseminated by one or more major market data vendors and broadly
displayed at least every 15 seconds during the Regular Market Session The Intraday
Indicative Value will be based on quotes and closing prices from the securitiesrsquo local
market and may not reflect events that occur subsequent to the local marketrsquos close
Premiums and discounts between the Intraday Indicative Value and the market price may
occur This should not be viewed as a ldquoreal timerdquo update of the NAV per Share of the
Fund which is calculated only once a day
The dissemination of the Intraday Indicative Value together with the Disclosed
Portfolio will allow investors to determine the value of the underlying portfolio of the
Fund on a daily basis and will provide a close estimate of that value throughout the
trading day
Investors will also be able to obtain the Fundrsquos Statement of Additional
Information (ldquoSAIrdquo) the Fundrsquos annual and semi-annual reports (together ldquoShareholder
Reportsrdquo) and its Form N-CSR and Form N-SAR filed twice a year The Fundrsquos SAI
and Shareholder Reports will be available free upon request from the Fund and those
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or
downloaded from the Commissionrsquos website at wwwsecgov Information regarding
Currently the NASDAQ OMX Global Index Data Service (ldquoGIDSrdquo) is the NASDAQ OMX global index data feed service offering real-time updates daily summary messages and access to widely followed indexes and Intraday Indicative Values for ETFs GIDS provides investment professionals with the daily information needed to track or trade NASDAQ OMX indexes listed ETFs or third-party partner indexes and ETFs
36
SR-NASDAQ-2015-011 Amendment No 2 Page 52 of 64
market price and trading volume of the Shares will be continually available on a real-time
basis throughout the day on brokersrsquo computer screens and other electronic services
Information regarding the previous dayrsquos closing price and trading volume information
for the Shares will be published daily in the financial section of newspapers Quotation
and last sale information for the Shares will be available via Nasdaq proprietary quote
and trade services as well as in accordance with the Unlisted Trading Privileges and the
Consolidated Tape Association (ldquoCTArdquo) plans for the Shares Quotation and last sale
information for the other ETFs in which the Fund will invest will be available via the
quote and trade services of their respective primary exchanges as well as in accordance
with the Unlisted Trading Privileges and the CTA plans as applicable Quotation and
last sale information for US exchange-traded options will be available via the Options
Price Reporting Authority Intraday executable price quotations on Floating Rate Debt
Instruments and other assets not traded on an exchange will be available from major
broker-dealer firms or market data vendors as well as from automated quotation systems
published or other public sources or online information services Additionally the Trade
Reporting and Compliance Engine (ldquoTRACErdquo) of the Financial Industry Regulatory
Authority (ldquoFINRArdquo) will be a source of price information for corporate bonds
privately-issued securities mortgage-backed securities and asset-backed securities to the
extent transactions in such securities are reported to TRACE37 For exchange-traded
Broker-dealers that are FINRA member firms have an obligation to report transactions in specified debt securities to TRACE to the extent required under applicable FINRA rules Generally such debt securities will have at issuance a maturity that exceeds one calendar year
37
SR-NASDAQ-2015-011 Amendment No 2 Page 53 of 64
assets intraday pricing information will be available directly from the applicable listing
exchange
Additional information regarding the Fund and the Shares including investment
strategies risks creation and redemption procedures fees Fund holdings disclosure
policies distributions and taxes will be included in the Registration Statement
Initial and Continued Listing
The Shares will be subject to Rule 5735 which sets forth the initial and continued
listing criteria applicable to Managed Fund Shares The Exchange represents that for
initial andor continued listing the Fund must be in compliance with Rule 10A-338 under
the Act A minimum of 100000 Shares will be outstanding at the commencement of
trading on the Exchange The Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the NAV and the
Disclosed Portfolio will be made available to all market participants at the same time
Trading Halts
With respect to trading halts the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading in the Shares of the Fund Nasdaq will
halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12) Trading may be
halted because of market conditions or for reasons that in the view of the Exchange
make trading in the Shares inadvisable These may include (1) the extent to which
trading is not occurring in the securities andor the other assets constituting the Disclosed
Portfolio of the Fund or (2) whether other unusual conditions or circumstances
See 17 CFR 24010A-3 38
SR-NASDAQ-2015-011 Amendment No 2 Page 54 of 64
detrimental to the maintenance of a fair and orderly market are present Trading in the
Shares also will be subject to Rule 5735(d)(2)(D) which sets forth circumstances under
which Shares of the Fund may be halted
Trading Rules
Nasdaq deems the Shares to be equity securities thus rendering trading in the
Shares subject to Nasdaqrsquos existing rules governing the trading of equity securities
Nasdaq will allow trading in the Shares from 400 am until 800 pm Eastern Time
The Exchange has appropriate rules to facilitate transactions in the Shares during all
trading sessions As provided in Nasdaq Rule 5735(b)(3) the minimum price variation
for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $001
Surveillance
The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws39 The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities laws
The surveillances referred to above generally focus on detecting securities trading
outside their normal patterns which could be indicative of manipulative or other violative
activity When such situations are detected surveillance analysis follows and
FINRA surveils trading on the Exchange pursuant to a regulatory services agreement The Exchange is responsible for FINRArsquos performance under this regulatory services agreement
39
SR-NASDAQ-2015-011 Amendment No 2 Page 55 of 64
investigations are opened where appropriate to review the behavior of all relevant
parties for all relevant trading violations
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 56 of 64
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
SR-NASDAQ-2015-011 Amendment No 2 Page 57 of 64
2 Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
SR-NASDAQ-2015-011 Amendment No 2 Page 58 of 64
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
SR-NASDAQ-2015-011 Amendment No 2 Page 59 of 64
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
SR-NASDAQ-2015-011 Amendment No 2 Page 60 of 64
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 61 of 64
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
SR-NASDAQ-2015-011 Amendment No 2 Page 62 of 64
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
B Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
C Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received From Members Participants or Others
Written comments were neither solicited nor received
III Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Within 45 days of the date of publication of this notice in the Federal Register or
within such longer period (i) as the Commission may designate up to 90 days of such date
if it finds such longer period to be appropriate and publishes its reasons for so finding or
(ii) as to which the Exchange consents the Commission shall (a) by order approve or
disapprove such proposed rule change or (b) institute proceedings to determine whether
the proposed rule change should be disapproved
SR-NASDAQ-2015-011 Amendment No 2 Page 63 of 64
IV Solicitation of Comments
Interested persons are invited to submit written data views and arguments
concerning the foregoing including whether the proposed rule change is consistent with
the Act Comments may be submitted by any of the following methods
Electronic comments
bull Use the Commissionrsquos Internet comment form
(httpwwwsecgovrulessroshtml) or
bull Send an e-mail to rule-commentssecgov Please include File Number
SR-NASDAQ-2015-011 on the subject line
Paper comments
bull Send paper comments in triplicate to Brent J Fields Secretary Securities and
Exchange Commission Station Place 100 F Street NE Washington DC
20549-9303
All submissions should refer to File Number SR-NASDAQ-2015-011 This file number
should be included on the subject line if e-mail is used To help the Commission process
and review your comments more efficiently please use only one method The
Commission will post all comments on the Commissionrsquos Internet website
httpwwwsecgovrulessroshtml
Copies of the submission all subsequent amendments all written statements with
respect to the proposed rule change that are filed with the Commission and all written
communications relating to the proposed rule change between the Commission and any
person other than those that may be withheld from the public in accordance with the
provisions of 5 USC 552 will be available for website viewing and printing in the
Commissionrsquos Public Reference Room 100 F Street NE Washington DC 20549 on
SR-NASDAQ-2015-011 Amendment No 2 Page 64 of 64
official business days between the hours of 1000 am and 300 pm Copies of the filing
also will be available for inspection and copying at the principal office of Nasdaq All
comments received will be posted without change the Commission does not edit
personal identifying information from submissions You should submit only information
that you wish to make available publicly
All submissions should refer to File Number SR-NASDAQ-2015-011 and should
be submitted on or before [insert date 21 days from publication in the Federal Register]
For the Commission by the Division of Trading and Markets pursuant to
delegated authority41
Kevin M OrsquoNeill Deputy Secretary
17 CFR 20030-3(a)(12) 41
SR-NASDAQ-2015-011 Amendment No 2 Page 42 of 64
of non-US issuers in developed markets privately-issued securities 23 asset-backed
securities 24 mortgage-backed securities 25 municipal bonds money market securities26
and investment companies27 (including investment companies advised by the Adviser)
that invest primarily in the foregoing types of debt securities
Further to pursue its investment objective the Fund may invest up to 20 of the
value of its net assets in exchange-listed options on US Treasury futures contracts and
exchange-listed US Treasury futures contracts28 The use of these derivative
transactions may allow the Fund to obtain net long or short exposures to selected interest
rates These derivatives may also be used to hedge risks including interest rate risks and
credit risks associated with the Fundrsquos portfolio investments The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
23 See footnote 12 above
24 See footnote 13 above
25 See footnote 14 above
26 ldquoMoney market securitiesrdquo for these purposes generally includes short-term high-quality obligations issued or guaranteed by the US Treasury or the agencies or instrumentalities of the US government short-term high-quality securities issued or guaranteed by non-US governments agencies and instrumentalities repurchase agreements commercial paper (both asset-backed and non-assetshybacked) and deposits and other obligations of US and non-US banks and financial institutions
27 See footnote 16 above
28 At least 90 of the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be invested in instruments that trade in markets that are members of the Intermarket Surveillance Group (ldquoISGrdquo) (see footnote 40 below) or are parties to a comprehensive surveillance sharing agreement with the Exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 43 of 64
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index
Investment Restrictions
The Fund will not invest 25 or more of the value of its total assets in securities
of issuers in any one industry This restriction does not apply to (a) obligations issued or
guaranteed by the US government its agencies or instrumentalities or (b) securities of
other investment companies29
The Fund may hold up to an aggregate amount of 15 of its net assets in illiquid
assets (calculated at the time of investment) including Rule 144A securities deemed
illiquid by the Adviser30 The Fund will monitor its portfolio liquidity on an ongoing
basis to determine whether in light of current circumstances an adequate level of
liquidity is being maintained and will consider taking appropriate steps in order to
maintain adequate liquidity if through a change in values net assets or other
circumstances more than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid
assets include securities subject to contractual or other restrictions on resale and other
29 See Form N-1A Item 9 The Commission has taken the position that a fund is concentrated if it invests more than 25 of the value of its total assets in any one industry See eg Investment Company Act Release No 9011 (October 30 1975) 40 FR 54241 (November 21 1975)
30 In reaching liquidity decisions the Adviser may consider the following factors the frequency of trades and quotes for the security the number of dealers wishing to purchase or sell the security and the number of other potential purchasers dealer undertakings to make a market in the security and the nature of the security and the nature of the marketplace in which it trades (eg the time needed to dispose of the security the method of soliciting offers and the mechanics of transfer)
SR-NASDAQ-2015-011 Amendment No 2 Page 44 of 64
instruments that lack readily available markets as determined in accordance with
Commission staff guidance31
The Fund will not invest in non-US equity securities
Creation and Redemption of Shares
The Fund will issue and redeem Shares on a continuous basis at net asset value
(ldquoNAVrdquo)32 only in large blocks of Shares (ldquoCreation Unitsrdquo) in transactions with
authorized participants generally including broker-dealers and large institutional
investors (ldquoAuthorized Participantsrdquo) Creation Units generally will consist of 50000
Shares although this may change from time to time Creation Units however are not
expected to consist of less than 50000 Shares As described in the Registration
Statement and consistent with the Exemptive Relief the Fund will issue and redeem
Creation Units in exchange for an in-kind portfolio of instruments andor cash in lieu of
31 The Commission has stated that long-standing Commission guidelines have required open-end funds to hold no more than 15 of their net assets in illiquid securities and other illiquid assets See Investment Company Act Release No 28193 (March 11 2008) 73 FR 14618 (March 18 2008) footnote 34 See also Investment Company Act Release No 5847 (October 21 1969) 35 FR 19989 (December 31 1970) (Statement Regarding ldquoRestricted Securitiesrdquo) Investment Company Act Release No 18612 (March 12 1992) 57 FR 9828 (March 20 1992) (Revisions of Guidelines to Form N-1A) A fundrsquos portfolio security is illiquid if it cannot be disposed of in the ordinary course of business within seven days at approximately the value ascribed to it by the fund See Investment Company Act Release No 14983 (March 12 1986) 51 FR 9773 (March 21 1986) (adopting amendments to Rule 2a-7 under the 1940 Act) Investment Company Act Release No 17452 (April 23 1990) 55 FR 17933 (April 30 1990) (adopting Rule 144A under the Securities Act of 1933)
32 The NAV of the Fundrsquos Shares generally will be calculated once daily Monday through Friday as of the close of regular trading on the New York Stock Exchange generally 400 pm Eastern Time (the ldquoNAV Calculation Timerdquo) NAV per Share will be calculated by dividing the Fundrsquos net assets by the number of Fund Shares outstanding For more information regarding the valuation of Fund investments in calculating the Fundrsquos NAV see the Registration Statement
SR-NASDAQ-2015-011 Amendment No 2 Page 45 of 64
such instruments (the ldquoCreation Basketrdquo) In addition if there is a difference between the
NAV attributable to a Creation Unit and the market value of the Creation Basket
exchanged for the Creation Unit the party conveying instruments with the lower value
will pay to the other an amount in cash equal to the difference (referred to as the ldquoCash
Componentrdquo)
Creations and redemptions must be made by or through an Authorized Participant
that has executed an agreement that has been agreed to by the Distributor and BNY with
respect to creations and redemptions of Creation Units All standard orders to create
Creation Units must be received by the transfer agent no later than the closing time of the
regular trading session on the New York Stock Exchange (ordinarily 400 pm Eastern
Time) (the ldquoClosing Timerdquo) in each case on the date such order is placed in order for the
creation of Creation Units to be effected based on the NAV of Shares as next determined
on such date after receipt of the order in proper form Shares may be redeemed only in
Creation Units at their NAV next determined after receipt not later than the Closing Time
of a redemption request in proper form by the Fund through the transfer agent and only
on a business day
The Fundrsquos custodian through the National Securities Clearing Corporation will
make available on each business day prior to the opening of business of the Exchange
the list of the names and quantities of the instruments comprising the Creation Basket as
well as the estimated Cash Component (if any) for that day The published Creation
Basket will apply until a new Creation Basket is announced on the following business
day prior to commencement of trading in the Shares
SR-NASDAQ-2015-011 Amendment No 2 Page 46 of 64
Net Asset Value
The Fundrsquos NAV will be determined as of the close of trading (normally
400 pm Eastern Time) on each day the New York Stock Exchange is open for
business NAV will be calculated for the Fund by taking the market price of the Fundrsquos
total assets including interest or dividends accrued but not yet collected less all
liabilities and dividing such amount by the total number of Shares outstanding The
result rounded to the nearest cent will be the NAV per Share All valuations will be
subject to review by the Board of Trustees of the Trust (ldquoTrust Boardrdquo) or its delegate
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with valuation procedures (which may be revised from time to time) adopted by the Trust
Board (the ldquoValuation Proceduresrdquo) and in accordance with the 1940 Act A market
valuation generally means a valuation (i) obtained from an exchange an independent
pricing service (ldquoPricing Servicerdquo) or a major market maker (or dealer) or (ii) based on a
price quotation or other equivalent indication of value supplied by an exchange a Pricing
Service or a major market maker (or dealer) The information summarized below is
based on the Valuation Procedures as currently in effect however as noted above the
Valuation Procedures are amended from time to time and therefore such information is
subject to change
Certain securities including Floating Rate Debt Instruments in which the Fund
may invest will not be listed on any securities exchange or board of trade Such
securities will typically be bought and sold by institutional investors in individually
negotiated private transactions that function in many respects like an over-the-counter
SR-NASDAQ-2015-011 Amendment No 2 Page 47 of 64
secondary market although typically no formal market makers will exist Certain
securities particularly debt securities will have few or no trades or trade infrequently
and information regarding a specific security may not be widely available or may be
incomplete Accordingly determinations of the fair value of debt securities may be
based on infrequent and dated information Because there is less reliable objective data
available elements of judgment may play a greater role in valuation of debt securities
than for other types of securities Typically Floating Rate Debt Instruments and other
debt securities in which the Fund may invest (other than those described below) will be
valued using information provided by a Pricing Service Debt securities having a
remaining maturity of 60 days or less when purchased will be valued at cost adjusted for
amortization of premiums and accretion of discounts provided the Adviserrsquos pricing
committee (the ldquoPricing Committeerdquo) has determined that the use of amortized cost is an
appropriate reflection of fair value given market and issuer-specific conditions existing at
the time of the determination Overnight repurchase agreements will be valued at cost
and term repurchase agreements (ie those whose maturity exceeds seven days) will be
valued at the average of the bid quotations obtained daily from at least two recognized
dealers
Asset-backed and mortgage-backed securities will generally be valued by using a
Pricing Service If a Pricing Service does not cover a particular asset-backed or
mortgage-backed security or discontinues covering a particular asset-backed or
mortgage-backed security the security will be priced using broker quotes generally
provided by brokers that make or participate in markets in the security To derive values
Pricing Services and broker-dealers may use matrix pricing and valuation models as well
SR-NASDAQ-2015-011 Amendment No 2 Page 48 of 64
as recent market transactions for the same or similar assets As it deems appropriate the
Pricing Committee may determine that a Pricing Service price does not represent an
accurate value of an asset-backed or mortgage-backed security based on broker quotes it
receives a recent trade in the security by the Fund information from a portfolio manager
or other market information In the event that the Pricing Committee determines that the
Pricing Service price is unreliable or inaccurate based on such other information broker
quotes may be used Additionally if the Pricing Committee determines that the price of
an asset-backed or mortgage-backed security obtained from a Pricing Service and
available broker quotes is unreliable or inaccurate due to market conditions or other
reasons or if a Pricing Service price or broker quote is unavailable the security will be
valued using fair value pricing as described below
Equity securities listed on any exchange other than the Exchange will be valued at
the last sale price on the exchange on which they are principally traded on the business
day as of which such value is being determined Equity securities listed on the Exchange
will be valued at the official closing price on the business day as of which such value is
being determined If there has been no sale on such day or no official closing price in
the case of securities traded on the Exchange the securities will be valued using fair
value pricing as described below Equity securities traded on more than one securities
exchange will be valued at the last sale price or official closing price as applicable on
the business day as of which such value is being determined at the close of the exchange
representing the principal market for such securities
Exchange-traded options and futures contracts will be valued at the closing price
in the market where such contracts are principally traded
SR-NASDAQ-2015-011 Amendment No 2 Page 49 of 64
Certain securities including Floating Rate Debt Instruments in which the Fund
will invest will not be able to be priced by pre-established pricing methods Such
securities may be valued by the Trust Board or its delegate at fair value The use of fair
value pricing by the Fund will be governed by the Valuation Procedures and conducted in
accordance with the provisions of the 1940 Act Valuing the Fundrsquos securities using fair
value pricing will result in using prices for those securities that may differ from current
market valuations or official closing prices on the applicable exchange
Availability of Information
The Fundrsquos website (wwwftportfolioscom) which will be publicly available
prior to the public offering of Shares will include a form of the prospectus for the Fund
that may be downloaded The website will include the Sharesrsquo ticker CUSIP and
exchange information along with additional quantitative information updated on a daily
basis including for the Fund (1) daily trading volume the prior business dayrsquos reported
NAV and closing price mid-point of the bidask spread at the time of calculation of such
NAV (the ldquoBidAsk Pricerdquo)33 and a calculation of the premium and discount of the
BidAsk Price against the NAV and (2) data in chart format displaying the frequency
distribution of discounts and premiums of the daily BidAsk Price against the NAV
within appropriate ranges for each of the four previous calendar quarters On each
business day before commencement of trading in Shares in the Regular Market Session34
33 The BidAsk Price of the Fund will be determined using the mid-point of the highest bid and the lowest offer on the Exchange as of the time of calculation of the Fundrsquos NAV The records relating to BidAsk Prices will be retained by the Fund and its service providers
34 See Nasdaq Rule 4120(b)(4) (describing the three trading sessions on the Exchange (1) Pre-Market Session from 4 am to 930 am Eastern Time (2)
SR-NASDAQ-2015-011 Amendment No 2 Page 50 of 64
on the Exchange the Fund will disclose on its website the identities and quantities of the
portfolio of securities and other assets (the ldquoDisclosed Portfoliordquo as defined in Nasdaq
Rule 5735(c)(2)) held by the Fund that will form the basis for the Fundrsquos calculation of
NAV at the end of the business day 35 The Fundrsquos disclosure of derivative positions in
the Disclosed Portfolio will include information that market participants can use to value
these positions intraday On a daily basis the Fund will disclose on the Fundrsquos website
the following information regarding each portfolio holding as applicable to the type of
holding ticker symbol CUSIP number or other identifier if any a description of the
holding (including the type of holding) the identity of the security or other asset or
instrument underlying the holding if any for options the option strike price quantity
held (as measured by for example par value notional value or number of shares
contracts or units) maturity date if any coupon rate if any effective date if any market
value of the holding and percentage weighting of the holding in the Fundrsquos portfolio
The website information will be publicly available at no charge
In addition for the Fund an estimated value defined in Rule 5735(c)(3) as the
ldquoIntraday Indicative Valuerdquo that reflects an estimated intraday value of the Fundrsquos
Disclosed Portfolio will be disseminated Moreover the Intraday Indicative Value
Regular Market Session from 930 am to 4 pm or 415 pm Eastern Time and (3) Post-Market Session from 4 pm or 415 pm to 8 pm Eastern Time)
Under accounting procedures to be followed by the Fund trades made on the prior business day (ldquoTrdquo) will be booked and reflected in NAV on the current business day (ldquoT+1rdquo) Accordingly the Fund will be able to disclose at the beginning of the business day the portfolio that will form the basis for the NAV calculation at the end of the business day
35
SR-NASDAQ-2015-011 Amendment No 2 Page 51 of 64
available on the NASDAQ OMX Information LLC proprietary index data service36 will
be based upon the current value for the components of the Disclosed Portfolio and will be
updated and widely disseminated by one or more major market data vendors and broadly
displayed at least every 15 seconds during the Regular Market Session The Intraday
Indicative Value will be based on quotes and closing prices from the securitiesrsquo local
market and may not reflect events that occur subsequent to the local marketrsquos close
Premiums and discounts between the Intraday Indicative Value and the market price may
occur This should not be viewed as a ldquoreal timerdquo update of the NAV per Share of the
Fund which is calculated only once a day
The dissemination of the Intraday Indicative Value together with the Disclosed
Portfolio will allow investors to determine the value of the underlying portfolio of the
Fund on a daily basis and will provide a close estimate of that value throughout the
trading day
Investors will also be able to obtain the Fundrsquos Statement of Additional
Information (ldquoSAIrdquo) the Fundrsquos annual and semi-annual reports (together ldquoShareholder
Reportsrdquo) and its Form N-CSR and Form N-SAR filed twice a year The Fundrsquos SAI
and Shareholder Reports will be available free upon request from the Fund and those
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or
downloaded from the Commissionrsquos website at wwwsecgov Information regarding
Currently the NASDAQ OMX Global Index Data Service (ldquoGIDSrdquo) is the NASDAQ OMX global index data feed service offering real-time updates daily summary messages and access to widely followed indexes and Intraday Indicative Values for ETFs GIDS provides investment professionals with the daily information needed to track or trade NASDAQ OMX indexes listed ETFs or third-party partner indexes and ETFs
36
SR-NASDAQ-2015-011 Amendment No 2 Page 52 of 64
market price and trading volume of the Shares will be continually available on a real-time
basis throughout the day on brokersrsquo computer screens and other electronic services
Information regarding the previous dayrsquos closing price and trading volume information
for the Shares will be published daily in the financial section of newspapers Quotation
and last sale information for the Shares will be available via Nasdaq proprietary quote
and trade services as well as in accordance with the Unlisted Trading Privileges and the
Consolidated Tape Association (ldquoCTArdquo) plans for the Shares Quotation and last sale
information for the other ETFs in which the Fund will invest will be available via the
quote and trade services of their respective primary exchanges as well as in accordance
with the Unlisted Trading Privileges and the CTA plans as applicable Quotation and
last sale information for US exchange-traded options will be available via the Options
Price Reporting Authority Intraday executable price quotations on Floating Rate Debt
Instruments and other assets not traded on an exchange will be available from major
broker-dealer firms or market data vendors as well as from automated quotation systems
published or other public sources or online information services Additionally the Trade
Reporting and Compliance Engine (ldquoTRACErdquo) of the Financial Industry Regulatory
Authority (ldquoFINRArdquo) will be a source of price information for corporate bonds
privately-issued securities mortgage-backed securities and asset-backed securities to the
extent transactions in such securities are reported to TRACE37 For exchange-traded
Broker-dealers that are FINRA member firms have an obligation to report transactions in specified debt securities to TRACE to the extent required under applicable FINRA rules Generally such debt securities will have at issuance a maturity that exceeds one calendar year
37
SR-NASDAQ-2015-011 Amendment No 2 Page 53 of 64
assets intraday pricing information will be available directly from the applicable listing
exchange
Additional information regarding the Fund and the Shares including investment
strategies risks creation and redemption procedures fees Fund holdings disclosure
policies distributions and taxes will be included in the Registration Statement
Initial and Continued Listing
The Shares will be subject to Rule 5735 which sets forth the initial and continued
listing criteria applicable to Managed Fund Shares The Exchange represents that for
initial andor continued listing the Fund must be in compliance with Rule 10A-338 under
the Act A minimum of 100000 Shares will be outstanding at the commencement of
trading on the Exchange The Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the NAV and the
Disclosed Portfolio will be made available to all market participants at the same time
Trading Halts
With respect to trading halts the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading in the Shares of the Fund Nasdaq will
halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12) Trading may be
halted because of market conditions or for reasons that in the view of the Exchange
make trading in the Shares inadvisable These may include (1) the extent to which
trading is not occurring in the securities andor the other assets constituting the Disclosed
Portfolio of the Fund or (2) whether other unusual conditions or circumstances
See 17 CFR 24010A-3 38
SR-NASDAQ-2015-011 Amendment No 2 Page 54 of 64
detrimental to the maintenance of a fair and orderly market are present Trading in the
Shares also will be subject to Rule 5735(d)(2)(D) which sets forth circumstances under
which Shares of the Fund may be halted
Trading Rules
Nasdaq deems the Shares to be equity securities thus rendering trading in the
Shares subject to Nasdaqrsquos existing rules governing the trading of equity securities
Nasdaq will allow trading in the Shares from 400 am until 800 pm Eastern Time
The Exchange has appropriate rules to facilitate transactions in the Shares during all
trading sessions As provided in Nasdaq Rule 5735(b)(3) the minimum price variation
for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $001
Surveillance
The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws39 The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities laws
The surveillances referred to above generally focus on detecting securities trading
outside their normal patterns which could be indicative of manipulative or other violative
activity When such situations are detected surveillance analysis follows and
FINRA surveils trading on the Exchange pursuant to a regulatory services agreement The Exchange is responsible for FINRArsquos performance under this regulatory services agreement
39
SR-NASDAQ-2015-011 Amendment No 2 Page 55 of 64
investigations are opened where appropriate to review the behavior of all relevant
parties for all relevant trading violations
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 56 of 64
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
SR-NASDAQ-2015-011 Amendment No 2 Page 57 of 64
2 Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
SR-NASDAQ-2015-011 Amendment No 2 Page 58 of 64
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
SR-NASDAQ-2015-011 Amendment No 2 Page 59 of 64
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
SR-NASDAQ-2015-011 Amendment No 2 Page 60 of 64
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 61 of 64
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
SR-NASDAQ-2015-011 Amendment No 2 Page 62 of 64
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
B Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
C Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received From Members Participants or Others
Written comments were neither solicited nor received
III Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Within 45 days of the date of publication of this notice in the Federal Register or
within such longer period (i) as the Commission may designate up to 90 days of such date
if it finds such longer period to be appropriate and publishes its reasons for so finding or
(ii) as to which the Exchange consents the Commission shall (a) by order approve or
disapprove such proposed rule change or (b) institute proceedings to determine whether
the proposed rule change should be disapproved
SR-NASDAQ-2015-011 Amendment No 2 Page 63 of 64
IV Solicitation of Comments
Interested persons are invited to submit written data views and arguments
concerning the foregoing including whether the proposed rule change is consistent with
the Act Comments may be submitted by any of the following methods
Electronic comments
bull Use the Commissionrsquos Internet comment form
(httpwwwsecgovrulessroshtml) or
bull Send an e-mail to rule-commentssecgov Please include File Number
SR-NASDAQ-2015-011 on the subject line
Paper comments
bull Send paper comments in triplicate to Brent J Fields Secretary Securities and
Exchange Commission Station Place 100 F Street NE Washington DC
20549-9303
All submissions should refer to File Number SR-NASDAQ-2015-011 This file number
should be included on the subject line if e-mail is used To help the Commission process
and review your comments more efficiently please use only one method The
Commission will post all comments on the Commissionrsquos Internet website
httpwwwsecgovrulessroshtml
Copies of the submission all subsequent amendments all written statements with
respect to the proposed rule change that are filed with the Commission and all written
communications relating to the proposed rule change between the Commission and any
person other than those that may be withheld from the public in accordance with the
provisions of 5 USC 552 will be available for website viewing and printing in the
Commissionrsquos Public Reference Room 100 F Street NE Washington DC 20549 on
SR-NASDAQ-2015-011 Amendment No 2 Page 64 of 64
official business days between the hours of 1000 am and 300 pm Copies of the filing
also will be available for inspection and copying at the principal office of Nasdaq All
comments received will be posted without change the Commission does not edit
personal identifying information from submissions You should submit only information
that you wish to make available publicly
All submissions should refer to File Number SR-NASDAQ-2015-011 and should
be submitted on or before [insert date 21 days from publication in the Federal Register]
For the Commission by the Division of Trading and Markets pursuant to
delegated authority41
Kevin M OrsquoNeill Deputy Secretary
17 CFR 20030-3(a)(12) 41
SR-NASDAQ-2015-011 Amendment No 2 Page 43 of 64
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
index
Investment Restrictions
The Fund will not invest 25 or more of the value of its total assets in securities
of issuers in any one industry This restriction does not apply to (a) obligations issued or
guaranteed by the US government its agencies or instrumentalities or (b) securities of
other investment companies29
The Fund may hold up to an aggregate amount of 15 of its net assets in illiquid
assets (calculated at the time of investment) including Rule 144A securities deemed
illiquid by the Adviser30 The Fund will monitor its portfolio liquidity on an ongoing
basis to determine whether in light of current circumstances an adequate level of
liquidity is being maintained and will consider taking appropriate steps in order to
maintain adequate liquidity if through a change in values net assets or other
circumstances more than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid
assets include securities subject to contractual or other restrictions on resale and other
29 See Form N-1A Item 9 The Commission has taken the position that a fund is concentrated if it invests more than 25 of the value of its total assets in any one industry See eg Investment Company Act Release No 9011 (October 30 1975) 40 FR 54241 (November 21 1975)
30 In reaching liquidity decisions the Adviser may consider the following factors the frequency of trades and quotes for the security the number of dealers wishing to purchase or sell the security and the number of other potential purchasers dealer undertakings to make a market in the security and the nature of the security and the nature of the marketplace in which it trades (eg the time needed to dispose of the security the method of soliciting offers and the mechanics of transfer)
SR-NASDAQ-2015-011 Amendment No 2 Page 44 of 64
instruments that lack readily available markets as determined in accordance with
Commission staff guidance31
The Fund will not invest in non-US equity securities
Creation and Redemption of Shares
The Fund will issue and redeem Shares on a continuous basis at net asset value
(ldquoNAVrdquo)32 only in large blocks of Shares (ldquoCreation Unitsrdquo) in transactions with
authorized participants generally including broker-dealers and large institutional
investors (ldquoAuthorized Participantsrdquo) Creation Units generally will consist of 50000
Shares although this may change from time to time Creation Units however are not
expected to consist of less than 50000 Shares As described in the Registration
Statement and consistent with the Exemptive Relief the Fund will issue and redeem
Creation Units in exchange for an in-kind portfolio of instruments andor cash in lieu of
31 The Commission has stated that long-standing Commission guidelines have required open-end funds to hold no more than 15 of their net assets in illiquid securities and other illiquid assets See Investment Company Act Release No 28193 (March 11 2008) 73 FR 14618 (March 18 2008) footnote 34 See also Investment Company Act Release No 5847 (October 21 1969) 35 FR 19989 (December 31 1970) (Statement Regarding ldquoRestricted Securitiesrdquo) Investment Company Act Release No 18612 (March 12 1992) 57 FR 9828 (March 20 1992) (Revisions of Guidelines to Form N-1A) A fundrsquos portfolio security is illiquid if it cannot be disposed of in the ordinary course of business within seven days at approximately the value ascribed to it by the fund See Investment Company Act Release No 14983 (March 12 1986) 51 FR 9773 (March 21 1986) (adopting amendments to Rule 2a-7 under the 1940 Act) Investment Company Act Release No 17452 (April 23 1990) 55 FR 17933 (April 30 1990) (adopting Rule 144A under the Securities Act of 1933)
32 The NAV of the Fundrsquos Shares generally will be calculated once daily Monday through Friday as of the close of regular trading on the New York Stock Exchange generally 400 pm Eastern Time (the ldquoNAV Calculation Timerdquo) NAV per Share will be calculated by dividing the Fundrsquos net assets by the number of Fund Shares outstanding For more information regarding the valuation of Fund investments in calculating the Fundrsquos NAV see the Registration Statement
SR-NASDAQ-2015-011 Amendment No 2 Page 45 of 64
such instruments (the ldquoCreation Basketrdquo) In addition if there is a difference between the
NAV attributable to a Creation Unit and the market value of the Creation Basket
exchanged for the Creation Unit the party conveying instruments with the lower value
will pay to the other an amount in cash equal to the difference (referred to as the ldquoCash
Componentrdquo)
Creations and redemptions must be made by or through an Authorized Participant
that has executed an agreement that has been agreed to by the Distributor and BNY with
respect to creations and redemptions of Creation Units All standard orders to create
Creation Units must be received by the transfer agent no later than the closing time of the
regular trading session on the New York Stock Exchange (ordinarily 400 pm Eastern
Time) (the ldquoClosing Timerdquo) in each case on the date such order is placed in order for the
creation of Creation Units to be effected based on the NAV of Shares as next determined
on such date after receipt of the order in proper form Shares may be redeemed only in
Creation Units at their NAV next determined after receipt not later than the Closing Time
of a redemption request in proper form by the Fund through the transfer agent and only
on a business day
The Fundrsquos custodian through the National Securities Clearing Corporation will
make available on each business day prior to the opening of business of the Exchange
the list of the names and quantities of the instruments comprising the Creation Basket as
well as the estimated Cash Component (if any) for that day The published Creation
Basket will apply until a new Creation Basket is announced on the following business
day prior to commencement of trading in the Shares
SR-NASDAQ-2015-011 Amendment No 2 Page 46 of 64
Net Asset Value
The Fundrsquos NAV will be determined as of the close of trading (normally
400 pm Eastern Time) on each day the New York Stock Exchange is open for
business NAV will be calculated for the Fund by taking the market price of the Fundrsquos
total assets including interest or dividends accrued but not yet collected less all
liabilities and dividing such amount by the total number of Shares outstanding The
result rounded to the nearest cent will be the NAV per Share All valuations will be
subject to review by the Board of Trustees of the Trust (ldquoTrust Boardrdquo) or its delegate
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with valuation procedures (which may be revised from time to time) adopted by the Trust
Board (the ldquoValuation Proceduresrdquo) and in accordance with the 1940 Act A market
valuation generally means a valuation (i) obtained from an exchange an independent
pricing service (ldquoPricing Servicerdquo) or a major market maker (or dealer) or (ii) based on a
price quotation or other equivalent indication of value supplied by an exchange a Pricing
Service or a major market maker (or dealer) The information summarized below is
based on the Valuation Procedures as currently in effect however as noted above the
Valuation Procedures are amended from time to time and therefore such information is
subject to change
Certain securities including Floating Rate Debt Instruments in which the Fund
may invest will not be listed on any securities exchange or board of trade Such
securities will typically be bought and sold by institutional investors in individually
negotiated private transactions that function in many respects like an over-the-counter
SR-NASDAQ-2015-011 Amendment No 2 Page 47 of 64
secondary market although typically no formal market makers will exist Certain
securities particularly debt securities will have few or no trades or trade infrequently
and information regarding a specific security may not be widely available or may be
incomplete Accordingly determinations of the fair value of debt securities may be
based on infrequent and dated information Because there is less reliable objective data
available elements of judgment may play a greater role in valuation of debt securities
than for other types of securities Typically Floating Rate Debt Instruments and other
debt securities in which the Fund may invest (other than those described below) will be
valued using information provided by a Pricing Service Debt securities having a
remaining maturity of 60 days or less when purchased will be valued at cost adjusted for
amortization of premiums and accretion of discounts provided the Adviserrsquos pricing
committee (the ldquoPricing Committeerdquo) has determined that the use of amortized cost is an
appropriate reflection of fair value given market and issuer-specific conditions existing at
the time of the determination Overnight repurchase agreements will be valued at cost
and term repurchase agreements (ie those whose maturity exceeds seven days) will be
valued at the average of the bid quotations obtained daily from at least two recognized
dealers
Asset-backed and mortgage-backed securities will generally be valued by using a
Pricing Service If a Pricing Service does not cover a particular asset-backed or
mortgage-backed security or discontinues covering a particular asset-backed or
mortgage-backed security the security will be priced using broker quotes generally
provided by brokers that make or participate in markets in the security To derive values
Pricing Services and broker-dealers may use matrix pricing and valuation models as well
SR-NASDAQ-2015-011 Amendment No 2 Page 48 of 64
as recent market transactions for the same or similar assets As it deems appropriate the
Pricing Committee may determine that a Pricing Service price does not represent an
accurate value of an asset-backed or mortgage-backed security based on broker quotes it
receives a recent trade in the security by the Fund information from a portfolio manager
or other market information In the event that the Pricing Committee determines that the
Pricing Service price is unreliable or inaccurate based on such other information broker
quotes may be used Additionally if the Pricing Committee determines that the price of
an asset-backed or mortgage-backed security obtained from a Pricing Service and
available broker quotes is unreliable or inaccurate due to market conditions or other
reasons or if a Pricing Service price or broker quote is unavailable the security will be
valued using fair value pricing as described below
Equity securities listed on any exchange other than the Exchange will be valued at
the last sale price on the exchange on which they are principally traded on the business
day as of which such value is being determined Equity securities listed on the Exchange
will be valued at the official closing price on the business day as of which such value is
being determined If there has been no sale on such day or no official closing price in
the case of securities traded on the Exchange the securities will be valued using fair
value pricing as described below Equity securities traded on more than one securities
exchange will be valued at the last sale price or official closing price as applicable on
the business day as of which such value is being determined at the close of the exchange
representing the principal market for such securities
Exchange-traded options and futures contracts will be valued at the closing price
in the market where such contracts are principally traded
SR-NASDAQ-2015-011 Amendment No 2 Page 49 of 64
Certain securities including Floating Rate Debt Instruments in which the Fund
will invest will not be able to be priced by pre-established pricing methods Such
securities may be valued by the Trust Board or its delegate at fair value The use of fair
value pricing by the Fund will be governed by the Valuation Procedures and conducted in
accordance with the provisions of the 1940 Act Valuing the Fundrsquos securities using fair
value pricing will result in using prices for those securities that may differ from current
market valuations or official closing prices on the applicable exchange
Availability of Information
The Fundrsquos website (wwwftportfolioscom) which will be publicly available
prior to the public offering of Shares will include a form of the prospectus for the Fund
that may be downloaded The website will include the Sharesrsquo ticker CUSIP and
exchange information along with additional quantitative information updated on a daily
basis including for the Fund (1) daily trading volume the prior business dayrsquos reported
NAV and closing price mid-point of the bidask spread at the time of calculation of such
NAV (the ldquoBidAsk Pricerdquo)33 and a calculation of the premium and discount of the
BidAsk Price against the NAV and (2) data in chart format displaying the frequency
distribution of discounts and premiums of the daily BidAsk Price against the NAV
within appropriate ranges for each of the four previous calendar quarters On each
business day before commencement of trading in Shares in the Regular Market Session34
33 The BidAsk Price of the Fund will be determined using the mid-point of the highest bid and the lowest offer on the Exchange as of the time of calculation of the Fundrsquos NAV The records relating to BidAsk Prices will be retained by the Fund and its service providers
34 See Nasdaq Rule 4120(b)(4) (describing the three trading sessions on the Exchange (1) Pre-Market Session from 4 am to 930 am Eastern Time (2)
SR-NASDAQ-2015-011 Amendment No 2 Page 50 of 64
on the Exchange the Fund will disclose on its website the identities and quantities of the
portfolio of securities and other assets (the ldquoDisclosed Portfoliordquo as defined in Nasdaq
Rule 5735(c)(2)) held by the Fund that will form the basis for the Fundrsquos calculation of
NAV at the end of the business day 35 The Fundrsquos disclosure of derivative positions in
the Disclosed Portfolio will include information that market participants can use to value
these positions intraday On a daily basis the Fund will disclose on the Fundrsquos website
the following information regarding each portfolio holding as applicable to the type of
holding ticker symbol CUSIP number or other identifier if any a description of the
holding (including the type of holding) the identity of the security or other asset or
instrument underlying the holding if any for options the option strike price quantity
held (as measured by for example par value notional value or number of shares
contracts or units) maturity date if any coupon rate if any effective date if any market
value of the holding and percentage weighting of the holding in the Fundrsquos portfolio
The website information will be publicly available at no charge
In addition for the Fund an estimated value defined in Rule 5735(c)(3) as the
ldquoIntraday Indicative Valuerdquo that reflects an estimated intraday value of the Fundrsquos
Disclosed Portfolio will be disseminated Moreover the Intraday Indicative Value
Regular Market Session from 930 am to 4 pm or 415 pm Eastern Time and (3) Post-Market Session from 4 pm or 415 pm to 8 pm Eastern Time)
Under accounting procedures to be followed by the Fund trades made on the prior business day (ldquoTrdquo) will be booked and reflected in NAV on the current business day (ldquoT+1rdquo) Accordingly the Fund will be able to disclose at the beginning of the business day the portfolio that will form the basis for the NAV calculation at the end of the business day
35
SR-NASDAQ-2015-011 Amendment No 2 Page 51 of 64
available on the NASDAQ OMX Information LLC proprietary index data service36 will
be based upon the current value for the components of the Disclosed Portfolio and will be
updated and widely disseminated by one or more major market data vendors and broadly
displayed at least every 15 seconds during the Regular Market Session The Intraday
Indicative Value will be based on quotes and closing prices from the securitiesrsquo local
market and may not reflect events that occur subsequent to the local marketrsquos close
Premiums and discounts between the Intraday Indicative Value and the market price may
occur This should not be viewed as a ldquoreal timerdquo update of the NAV per Share of the
Fund which is calculated only once a day
The dissemination of the Intraday Indicative Value together with the Disclosed
Portfolio will allow investors to determine the value of the underlying portfolio of the
Fund on a daily basis and will provide a close estimate of that value throughout the
trading day
Investors will also be able to obtain the Fundrsquos Statement of Additional
Information (ldquoSAIrdquo) the Fundrsquos annual and semi-annual reports (together ldquoShareholder
Reportsrdquo) and its Form N-CSR and Form N-SAR filed twice a year The Fundrsquos SAI
and Shareholder Reports will be available free upon request from the Fund and those
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or
downloaded from the Commissionrsquos website at wwwsecgov Information regarding
Currently the NASDAQ OMX Global Index Data Service (ldquoGIDSrdquo) is the NASDAQ OMX global index data feed service offering real-time updates daily summary messages and access to widely followed indexes and Intraday Indicative Values for ETFs GIDS provides investment professionals with the daily information needed to track or trade NASDAQ OMX indexes listed ETFs or third-party partner indexes and ETFs
36
SR-NASDAQ-2015-011 Amendment No 2 Page 52 of 64
market price and trading volume of the Shares will be continually available on a real-time
basis throughout the day on brokersrsquo computer screens and other electronic services
Information regarding the previous dayrsquos closing price and trading volume information
for the Shares will be published daily in the financial section of newspapers Quotation
and last sale information for the Shares will be available via Nasdaq proprietary quote
and trade services as well as in accordance with the Unlisted Trading Privileges and the
Consolidated Tape Association (ldquoCTArdquo) plans for the Shares Quotation and last sale
information for the other ETFs in which the Fund will invest will be available via the
quote and trade services of their respective primary exchanges as well as in accordance
with the Unlisted Trading Privileges and the CTA plans as applicable Quotation and
last sale information for US exchange-traded options will be available via the Options
Price Reporting Authority Intraday executable price quotations on Floating Rate Debt
Instruments and other assets not traded on an exchange will be available from major
broker-dealer firms or market data vendors as well as from automated quotation systems
published or other public sources or online information services Additionally the Trade
Reporting and Compliance Engine (ldquoTRACErdquo) of the Financial Industry Regulatory
Authority (ldquoFINRArdquo) will be a source of price information for corporate bonds
privately-issued securities mortgage-backed securities and asset-backed securities to the
extent transactions in such securities are reported to TRACE37 For exchange-traded
Broker-dealers that are FINRA member firms have an obligation to report transactions in specified debt securities to TRACE to the extent required under applicable FINRA rules Generally such debt securities will have at issuance a maturity that exceeds one calendar year
37
SR-NASDAQ-2015-011 Amendment No 2 Page 53 of 64
assets intraday pricing information will be available directly from the applicable listing
exchange
Additional information regarding the Fund and the Shares including investment
strategies risks creation and redemption procedures fees Fund holdings disclosure
policies distributions and taxes will be included in the Registration Statement
Initial and Continued Listing
The Shares will be subject to Rule 5735 which sets forth the initial and continued
listing criteria applicable to Managed Fund Shares The Exchange represents that for
initial andor continued listing the Fund must be in compliance with Rule 10A-338 under
the Act A minimum of 100000 Shares will be outstanding at the commencement of
trading on the Exchange The Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the NAV and the
Disclosed Portfolio will be made available to all market participants at the same time
Trading Halts
With respect to trading halts the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading in the Shares of the Fund Nasdaq will
halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12) Trading may be
halted because of market conditions or for reasons that in the view of the Exchange
make trading in the Shares inadvisable These may include (1) the extent to which
trading is not occurring in the securities andor the other assets constituting the Disclosed
Portfolio of the Fund or (2) whether other unusual conditions or circumstances
See 17 CFR 24010A-3 38
SR-NASDAQ-2015-011 Amendment No 2 Page 54 of 64
detrimental to the maintenance of a fair and orderly market are present Trading in the
Shares also will be subject to Rule 5735(d)(2)(D) which sets forth circumstances under
which Shares of the Fund may be halted
Trading Rules
Nasdaq deems the Shares to be equity securities thus rendering trading in the
Shares subject to Nasdaqrsquos existing rules governing the trading of equity securities
Nasdaq will allow trading in the Shares from 400 am until 800 pm Eastern Time
The Exchange has appropriate rules to facilitate transactions in the Shares during all
trading sessions As provided in Nasdaq Rule 5735(b)(3) the minimum price variation
for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $001
Surveillance
The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws39 The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities laws
The surveillances referred to above generally focus on detecting securities trading
outside their normal patterns which could be indicative of manipulative or other violative
activity When such situations are detected surveillance analysis follows and
FINRA surveils trading on the Exchange pursuant to a regulatory services agreement The Exchange is responsible for FINRArsquos performance under this regulatory services agreement
39
SR-NASDAQ-2015-011 Amendment No 2 Page 55 of 64
investigations are opened where appropriate to review the behavior of all relevant
parties for all relevant trading violations
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 56 of 64
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
SR-NASDAQ-2015-011 Amendment No 2 Page 57 of 64
2 Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
SR-NASDAQ-2015-011 Amendment No 2 Page 58 of 64
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
SR-NASDAQ-2015-011 Amendment No 2 Page 59 of 64
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
SR-NASDAQ-2015-011 Amendment No 2 Page 60 of 64
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 61 of 64
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
SR-NASDAQ-2015-011 Amendment No 2 Page 62 of 64
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
B Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
C Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received From Members Participants or Others
Written comments were neither solicited nor received
III Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Within 45 days of the date of publication of this notice in the Federal Register or
within such longer period (i) as the Commission may designate up to 90 days of such date
if it finds such longer period to be appropriate and publishes its reasons for so finding or
(ii) as to which the Exchange consents the Commission shall (a) by order approve or
disapprove such proposed rule change or (b) institute proceedings to determine whether
the proposed rule change should be disapproved
SR-NASDAQ-2015-011 Amendment No 2 Page 63 of 64
IV Solicitation of Comments
Interested persons are invited to submit written data views and arguments
concerning the foregoing including whether the proposed rule change is consistent with
the Act Comments may be submitted by any of the following methods
Electronic comments
bull Use the Commissionrsquos Internet comment form
(httpwwwsecgovrulessroshtml) or
bull Send an e-mail to rule-commentssecgov Please include File Number
SR-NASDAQ-2015-011 on the subject line
Paper comments
bull Send paper comments in triplicate to Brent J Fields Secretary Securities and
Exchange Commission Station Place 100 F Street NE Washington DC
20549-9303
All submissions should refer to File Number SR-NASDAQ-2015-011 This file number
should be included on the subject line if e-mail is used To help the Commission process
and review your comments more efficiently please use only one method The
Commission will post all comments on the Commissionrsquos Internet website
httpwwwsecgovrulessroshtml
Copies of the submission all subsequent amendments all written statements with
respect to the proposed rule change that are filed with the Commission and all written
communications relating to the proposed rule change between the Commission and any
person other than those that may be withheld from the public in accordance with the
provisions of 5 USC 552 will be available for website viewing and printing in the
Commissionrsquos Public Reference Room 100 F Street NE Washington DC 20549 on
SR-NASDAQ-2015-011 Amendment No 2 Page 64 of 64
official business days between the hours of 1000 am and 300 pm Copies of the filing
also will be available for inspection and copying at the principal office of Nasdaq All
comments received will be posted without change the Commission does not edit
personal identifying information from submissions You should submit only information
that you wish to make available publicly
All submissions should refer to File Number SR-NASDAQ-2015-011 and should
be submitted on or before [insert date 21 days from publication in the Federal Register]
For the Commission by the Division of Trading and Markets pursuant to
delegated authority41
Kevin M OrsquoNeill Deputy Secretary
17 CFR 20030-3(a)(12) 41
SR-NASDAQ-2015-011 Amendment No 2 Page 44 of 64
instruments that lack readily available markets as determined in accordance with
Commission staff guidance31
The Fund will not invest in non-US equity securities
Creation and Redemption of Shares
The Fund will issue and redeem Shares on a continuous basis at net asset value
(ldquoNAVrdquo)32 only in large blocks of Shares (ldquoCreation Unitsrdquo) in transactions with
authorized participants generally including broker-dealers and large institutional
investors (ldquoAuthorized Participantsrdquo) Creation Units generally will consist of 50000
Shares although this may change from time to time Creation Units however are not
expected to consist of less than 50000 Shares As described in the Registration
Statement and consistent with the Exemptive Relief the Fund will issue and redeem
Creation Units in exchange for an in-kind portfolio of instruments andor cash in lieu of
31 The Commission has stated that long-standing Commission guidelines have required open-end funds to hold no more than 15 of their net assets in illiquid securities and other illiquid assets See Investment Company Act Release No 28193 (March 11 2008) 73 FR 14618 (March 18 2008) footnote 34 See also Investment Company Act Release No 5847 (October 21 1969) 35 FR 19989 (December 31 1970) (Statement Regarding ldquoRestricted Securitiesrdquo) Investment Company Act Release No 18612 (March 12 1992) 57 FR 9828 (March 20 1992) (Revisions of Guidelines to Form N-1A) A fundrsquos portfolio security is illiquid if it cannot be disposed of in the ordinary course of business within seven days at approximately the value ascribed to it by the fund See Investment Company Act Release No 14983 (March 12 1986) 51 FR 9773 (March 21 1986) (adopting amendments to Rule 2a-7 under the 1940 Act) Investment Company Act Release No 17452 (April 23 1990) 55 FR 17933 (April 30 1990) (adopting Rule 144A under the Securities Act of 1933)
32 The NAV of the Fundrsquos Shares generally will be calculated once daily Monday through Friday as of the close of regular trading on the New York Stock Exchange generally 400 pm Eastern Time (the ldquoNAV Calculation Timerdquo) NAV per Share will be calculated by dividing the Fundrsquos net assets by the number of Fund Shares outstanding For more information regarding the valuation of Fund investments in calculating the Fundrsquos NAV see the Registration Statement
SR-NASDAQ-2015-011 Amendment No 2 Page 45 of 64
such instruments (the ldquoCreation Basketrdquo) In addition if there is a difference between the
NAV attributable to a Creation Unit and the market value of the Creation Basket
exchanged for the Creation Unit the party conveying instruments with the lower value
will pay to the other an amount in cash equal to the difference (referred to as the ldquoCash
Componentrdquo)
Creations and redemptions must be made by or through an Authorized Participant
that has executed an agreement that has been agreed to by the Distributor and BNY with
respect to creations and redemptions of Creation Units All standard orders to create
Creation Units must be received by the transfer agent no later than the closing time of the
regular trading session on the New York Stock Exchange (ordinarily 400 pm Eastern
Time) (the ldquoClosing Timerdquo) in each case on the date such order is placed in order for the
creation of Creation Units to be effected based on the NAV of Shares as next determined
on such date after receipt of the order in proper form Shares may be redeemed only in
Creation Units at their NAV next determined after receipt not later than the Closing Time
of a redemption request in proper form by the Fund through the transfer agent and only
on a business day
The Fundrsquos custodian through the National Securities Clearing Corporation will
make available on each business day prior to the opening of business of the Exchange
the list of the names and quantities of the instruments comprising the Creation Basket as
well as the estimated Cash Component (if any) for that day The published Creation
Basket will apply until a new Creation Basket is announced on the following business
day prior to commencement of trading in the Shares
SR-NASDAQ-2015-011 Amendment No 2 Page 46 of 64
Net Asset Value
The Fundrsquos NAV will be determined as of the close of trading (normally
400 pm Eastern Time) on each day the New York Stock Exchange is open for
business NAV will be calculated for the Fund by taking the market price of the Fundrsquos
total assets including interest or dividends accrued but not yet collected less all
liabilities and dividing such amount by the total number of Shares outstanding The
result rounded to the nearest cent will be the NAV per Share All valuations will be
subject to review by the Board of Trustees of the Trust (ldquoTrust Boardrdquo) or its delegate
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with valuation procedures (which may be revised from time to time) adopted by the Trust
Board (the ldquoValuation Proceduresrdquo) and in accordance with the 1940 Act A market
valuation generally means a valuation (i) obtained from an exchange an independent
pricing service (ldquoPricing Servicerdquo) or a major market maker (or dealer) or (ii) based on a
price quotation or other equivalent indication of value supplied by an exchange a Pricing
Service or a major market maker (or dealer) The information summarized below is
based on the Valuation Procedures as currently in effect however as noted above the
Valuation Procedures are amended from time to time and therefore such information is
subject to change
Certain securities including Floating Rate Debt Instruments in which the Fund
may invest will not be listed on any securities exchange or board of trade Such
securities will typically be bought and sold by institutional investors in individually
negotiated private transactions that function in many respects like an over-the-counter
SR-NASDAQ-2015-011 Amendment No 2 Page 47 of 64
secondary market although typically no formal market makers will exist Certain
securities particularly debt securities will have few or no trades or trade infrequently
and information regarding a specific security may not be widely available or may be
incomplete Accordingly determinations of the fair value of debt securities may be
based on infrequent and dated information Because there is less reliable objective data
available elements of judgment may play a greater role in valuation of debt securities
than for other types of securities Typically Floating Rate Debt Instruments and other
debt securities in which the Fund may invest (other than those described below) will be
valued using information provided by a Pricing Service Debt securities having a
remaining maturity of 60 days or less when purchased will be valued at cost adjusted for
amortization of premiums and accretion of discounts provided the Adviserrsquos pricing
committee (the ldquoPricing Committeerdquo) has determined that the use of amortized cost is an
appropriate reflection of fair value given market and issuer-specific conditions existing at
the time of the determination Overnight repurchase agreements will be valued at cost
and term repurchase agreements (ie those whose maturity exceeds seven days) will be
valued at the average of the bid quotations obtained daily from at least two recognized
dealers
Asset-backed and mortgage-backed securities will generally be valued by using a
Pricing Service If a Pricing Service does not cover a particular asset-backed or
mortgage-backed security or discontinues covering a particular asset-backed or
mortgage-backed security the security will be priced using broker quotes generally
provided by brokers that make or participate in markets in the security To derive values
Pricing Services and broker-dealers may use matrix pricing and valuation models as well
SR-NASDAQ-2015-011 Amendment No 2 Page 48 of 64
as recent market transactions for the same or similar assets As it deems appropriate the
Pricing Committee may determine that a Pricing Service price does not represent an
accurate value of an asset-backed or mortgage-backed security based on broker quotes it
receives a recent trade in the security by the Fund information from a portfolio manager
or other market information In the event that the Pricing Committee determines that the
Pricing Service price is unreliable or inaccurate based on such other information broker
quotes may be used Additionally if the Pricing Committee determines that the price of
an asset-backed or mortgage-backed security obtained from a Pricing Service and
available broker quotes is unreliable or inaccurate due to market conditions or other
reasons or if a Pricing Service price or broker quote is unavailable the security will be
valued using fair value pricing as described below
Equity securities listed on any exchange other than the Exchange will be valued at
the last sale price on the exchange on which they are principally traded on the business
day as of which such value is being determined Equity securities listed on the Exchange
will be valued at the official closing price on the business day as of which such value is
being determined If there has been no sale on such day or no official closing price in
the case of securities traded on the Exchange the securities will be valued using fair
value pricing as described below Equity securities traded on more than one securities
exchange will be valued at the last sale price or official closing price as applicable on
the business day as of which such value is being determined at the close of the exchange
representing the principal market for such securities
Exchange-traded options and futures contracts will be valued at the closing price
in the market where such contracts are principally traded
SR-NASDAQ-2015-011 Amendment No 2 Page 49 of 64
Certain securities including Floating Rate Debt Instruments in which the Fund
will invest will not be able to be priced by pre-established pricing methods Such
securities may be valued by the Trust Board or its delegate at fair value The use of fair
value pricing by the Fund will be governed by the Valuation Procedures and conducted in
accordance with the provisions of the 1940 Act Valuing the Fundrsquos securities using fair
value pricing will result in using prices for those securities that may differ from current
market valuations or official closing prices on the applicable exchange
Availability of Information
The Fundrsquos website (wwwftportfolioscom) which will be publicly available
prior to the public offering of Shares will include a form of the prospectus for the Fund
that may be downloaded The website will include the Sharesrsquo ticker CUSIP and
exchange information along with additional quantitative information updated on a daily
basis including for the Fund (1) daily trading volume the prior business dayrsquos reported
NAV and closing price mid-point of the bidask spread at the time of calculation of such
NAV (the ldquoBidAsk Pricerdquo)33 and a calculation of the premium and discount of the
BidAsk Price against the NAV and (2) data in chart format displaying the frequency
distribution of discounts and premiums of the daily BidAsk Price against the NAV
within appropriate ranges for each of the four previous calendar quarters On each
business day before commencement of trading in Shares in the Regular Market Session34
33 The BidAsk Price of the Fund will be determined using the mid-point of the highest bid and the lowest offer on the Exchange as of the time of calculation of the Fundrsquos NAV The records relating to BidAsk Prices will be retained by the Fund and its service providers
34 See Nasdaq Rule 4120(b)(4) (describing the three trading sessions on the Exchange (1) Pre-Market Session from 4 am to 930 am Eastern Time (2)
SR-NASDAQ-2015-011 Amendment No 2 Page 50 of 64
on the Exchange the Fund will disclose on its website the identities and quantities of the
portfolio of securities and other assets (the ldquoDisclosed Portfoliordquo as defined in Nasdaq
Rule 5735(c)(2)) held by the Fund that will form the basis for the Fundrsquos calculation of
NAV at the end of the business day 35 The Fundrsquos disclosure of derivative positions in
the Disclosed Portfolio will include information that market participants can use to value
these positions intraday On a daily basis the Fund will disclose on the Fundrsquos website
the following information regarding each portfolio holding as applicable to the type of
holding ticker symbol CUSIP number or other identifier if any a description of the
holding (including the type of holding) the identity of the security or other asset or
instrument underlying the holding if any for options the option strike price quantity
held (as measured by for example par value notional value or number of shares
contracts or units) maturity date if any coupon rate if any effective date if any market
value of the holding and percentage weighting of the holding in the Fundrsquos portfolio
The website information will be publicly available at no charge
In addition for the Fund an estimated value defined in Rule 5735(c)(3) as the
ldquoIntraday Indicative Valuerdquo that reflects an estimated intraday value of the Fundrsquos
Disclosed Portfolio will be disseminated Moreover the Intraday Indicative Value
Regular Market Session from 930 am to 4 pm or 415 pm Eastern Time and (3) Post-Market Session from 4 pm or 415 pm to 8 pm Eastern Time)
Under accounting procedures to be followed by the Fund trades made on the prior business day (ldquoTrdquo) will be booked and reflected in NAV on the current business day (ldquoT+1rdquo) Accordingly the Fund will be able to disclose at the beginning of the business day the portfolio that will form the basis for the NAV calculation at the end of the business day
35
SR-NASDAQ-2015-011 Amendment No 2 Page 51 of 64
available on the NASDAQ OMX Information LLC proprietary index data service36 will
be based upon the current value for the components of the Disclosed Portfolio and will be
updated and widely disseminated by one or more major market data vendors and broadly
displayed at least every 15 seconds during the Regular Market Session The Intraday
Indicative Value will be based on quotes and closing prices from the securitiesrsquo local
market and may not reflect events that occur subsequent to the local marketrsquos close
Premiums and discounts between the Intraday Indicative Value and the market price may
occur This should not be viewed as a ldquoreal timerdquo update of the NAV per Share of the
Fund which is calculated only once a day
The dissemination of the Intraday Indicative Value together with the Disclosed
Portfolio will allow investors to determine the value of the underlying portfolio of the
Fund on a daily basis and will provide a close estimate of that value throughout the
trading day
Investors will also be able to obtain the Fundrsquos Statement of Additional
Information (ldquoSAIrdquo) the Fundrsquos annual and semi-annual reports (together ldquoShareholder
Reportsrdquo) and its Form N-CSR and Form N-SAR filed twice a year The Fundrsquos SAI
and Shareholder Reports will be available free upon request from the Fund and those
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or
downloaded from the Commissionrsquos website at wwwsecgov Information regarding
Currently the NASDAQ OMX Global Index Data Service (ldquoGIDSrdquo) is the NASDAQ OMX global index data feed service offering real-time updates daily summary messages and access to widely followed indexes and Intraday Indicative Values for ETFs GIDS provides investment professionals with the daily information needed to track or trade NASDAQ OMX indexes listed ETFs or third-party partner indexes and ETFs
36
SR-NASDAQ-2015-011 Amendment No 2 Page 52 of 64
market price and trading volume of the Shares will be continually available on a real-time
basis throughout the day on brokersrsquo computer screens and other electronic services
Information regarding the previous dayrsquos closing price and trading volume information
for the Shares will be published daily in the financial section of newspapers Quotation
and last sale information for the Shares will be available via Nasdaq proprietary quote
and trade services as well as in accordance with the Unlisted Trading Privileges and the
Consolidated Tape Association (ldquoCTArdquo) plans for the Shares Quotation and last sale
information for the other ETFs in which the Fund will invest will be available via the
quote and trade services of their respective primary exchanges as well as in accordance
with the Unlisted Trading Privileges and the CTA plans as applicable Quotation and
last sale information for US exchange-traded options will be available via the Options
Price Reporting Authority Intraday executable price quotations on Floating Rate Debt
Instruments and other assets not traded on an exchange will be available from major
broker-dealer firms or market data vendors as well as from automated quotation systems
published or other public sources or online information services Additionally the Trade
Reporting and Compliance Engine (ldquoTRACErdquo) of the Financial Industry Regulatory
Authority (ldquoFINRArdquo) will be a source of price information for corporate bonds
privately-issued securities mortgage-backed securities and asset-backed securities to the
extent transactions in such securities are reported to TRACE37 For exchange-traded
Broker-dealers that are FINRA member firms have an obligation to report transactions in specified debt securities to TRACE to the extent required under applicable FINRA rules Generally such debt securities will have at issuance a maturity that exceeds one calendar year
37
SR-NASDAQ-2015-011 Amendment No 2 Page 53 of 64
assets intraday pricing information will be available directly from the applicable listing
exchange
Additional information regarding the Fund and the Shares including investment
strategies risks creation and redemption procedures fees Fund holdings disclosure
policies distributions and taxes will be included in the Registration Statement
Initial and Continued Listing
The Shares will be subject to Rule 5735 which sets forth the initial and continued
listing criteria applicable to Managed Fund Shares The Exchange represents that for
initial andor continued listing the Fund must be in compliance with Rule 10A-338 under
the Act A minimum of 100000 Shares will be outstanding at the commencement of
trading on the Exchange The Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the NAV and the
Disclosed Portfolio will be made available to all market participants at the same time
Trading Halts
With respect to trading halts the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading in the Shares of the Fund Nasdaq will
halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12) Trading may be
halted because of market conditions or for reasons that in the view of the Exchange
make trading in the Shares inadvisable These may include (1) the extent to which
trading is not occurring in the securities andor the other assets constituting the Disclosed
Portfolio of the Fund or (2) whether other unusual conditions or circumstances
See 17 CFR 24010A-3 38
SR-NASDAQ-2015-011 Amendment No 2 Page 54 of 64
detrimental to the maintenance of a fair and orderly market are present Trading in the
Shares also will be subject to Rule 5735(d)(2)(D) which sets forth circumstances under
which Shares of the Fund may be halted
Trading Rules
Nasdaq deems the Shares to be equity securities thus rendering trading in the
Shares subject to Nasdaqrsquos existing rules governing the trading of equity securities
Nasdaq will allow trading in the Shares from 400 am until 800 pm Eastern Time
The Exchange has appropriate rules to facilitate transactions in the Shares during all
trading sessions As provided in Nasdaq Rule 5735(b)(3) the minimum price variation
for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $001
Surveillance
The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws39 The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities laws
The surveillances referred to above generally focus on detecting securities trading
outside their normal patterns which could be indicative of manipulative or other violative
activity When such situations are detected surveillance analysis follows and
FINRA surveils trading on the Exchange pursuant to a regulatory services agreement The Exchange is responsible for FINRArsquos performance under this regulatory services agreement
39
SR-NASDAQ-2015-011 Amendment No 2 Page 55 of 64
investigations are opened where appropriate to review the behavior of all relevant
parties for all relevant trading violations
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 56 of 64
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
SR-NASDAQ-2015-011 Amendment No 2 Page 57 of 64
2 Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
SR-NASDAQ-2015-011 Amendment No 2 Page 58 of 64
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
SR-NASDAQ-2015-011 Amendment No 2 Page 59 of 64
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
SR-NASDAQ-2015-011 Amendment No 2 Page 60 of 64
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 61 of 64
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
SR-NASDAQ-2015-011 Amendment No 2 Page 62 of 64
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
B Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
C Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received From Members Participants or Others
Written comments were neither solicited nor received
III Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Within 45 days of the date of publication of this notice in the Federal Register or
within such longer period (i) as the Commission may designate up to 90 days of such date
if it finds such longer period to be appropriate and publishes its reasons for so finding or
(ii) as to which the Exchange consents the Commission shall (a) by order approve or
disapprove such proposed rule change or (b) institute proceedings to determine whether
the proposed rule change should be disapproved
SR-NASDAQ-2015-011 Amendment No 2 Page 63 of 64
IV Solicitation of Comments
Interested persons are invited to submit written data views and arguments
concerning the foregoing including whether the proposed rule change is consistent with
the Act Comments may be submitted by any of the following methods
Electronic comments
bull Use the Commissionrsquos Internet comment form
(httpwwwsecgovrulessroshtml) or
bull Send an e-mail to rule-commentssecgov Please include File Number
SR-NASDAQ-2015-011 on the subject line
Paper comments
bull Send paper comments in triplicate to Brent J Fields Secretary Securities and
Exchange Commission Station Place 100 F Street NE Washington DC
20549-9303
All submissions should refer to File Number SR-NASDAQ-2015-011 This file number
should be included on the subject line if e-mail is used To help the Commission process
and review your comments more efficiently please use only one method The
Commission will post all comments on the Commissionrsquos Internet website
httpwwwsecgovrulessroshtml
Copies of the submission all subsequent amendments all written statements with
respect to the proposed rule change that are filed with the Commission and all written
communications relating to the proposed rule change between the Commission and any
person other than those that may be withheld from the public in accordance with the
provisions of 5 USC 552 will be available for website viewing and printing in the
Commissionrsquos Public Reference Room 100 F Street NE Washington DC 20549 on
SR-NASDAQ-2015-011 Amendment No 2 Page 64 of 64
official business days between the hours of 1000 am and 300 pm Copies of the filing
also will be available for inspection and copying at the principal office of Nasdaq All
comments received will be posted without change the Commission does not edit
personal identifying information from submissions You should submit only information
that you wish to make available publicly
All submissions should refer to File Number SR-NASDAQ-2015-011 and should
be submitted on or before [insert date 21 days from publication in the Federal Register]
For the Commission by the Division of Trading and Markets pursuant to
delegated authority41
Kevin M OrsquoNeill Deputy Secretary
17 CFR 20030-3(a)(12) 41
SR-NASDAQ-2015-011 Amendment No 2 Page 45 of 64
such instruments (the ldquoCreation Basketrdquo) In addition if there is a difference between the
NAV attributable to a Creation Unit and the market value of the Creation Basket
exchanged for the Creation Unit the party conveying instruments with the lower value
will pay to the other an amount in cash equal to the difference (referred to as the ldquoCash
Componentrdquo)
Creations and redemptions must be made by or through an Authorized Participant
that has executed an agreement that has been agreed to by the Distributor and BNY with
respect to creations and redemptions of Creation Units All standard orders to create
Creation Units must be received by the transfer agent no later than the closing time of the
regular trading session on the New York Stock Exchange (ordinarily 400 pm Eastern
Time) (the ldquoClosing Timerdquo) in each case on the date such order is placed in order for the
creation of Creation Units to be effected based on the NAV of Shares as next determined
on such date after receipt of the order in proper form Shares may be redeemed only in
Creation Units at their NAV next determined after receipt not later than the Closing Time
of a redemption request in proper form by the Fund through the transfer agent and only
on a business day
The Fundrsquos custodian through the National Securities Clearing Corporation will
make available on each business day prior to the opening of business of the Exchange
the list of the names and quantities of the instruments comprising the Creation Basket as
well as the estimated Cash Component (if any) for that day The published Creation
Basket will apply until a new Creation Basket is announced on the following business
day prior to commencement of trading in the Shares
SR-NASDAQ-2015-011 Amendment No 2 Page 46 of 64
Net Asset Value
The Fundrsquos NAV will be determined as of the close of trading (normally
400 pm Eastern Time) on each day the New York Stock Exchange is open for
business NAV will be calculated for the Fund by taking the market price of the Fundrsquos
total assets including interest or dividends accrued but not yet collected less all
liabilities and dividing such amount by the total number of Shares outstanding The
result rounded to the nearest cent will be the NAV per Share All valuations will be
subject to review by the Board of Trustees of the Trust (ldquoTrust Boardrdquo) or its delegate
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with valuation procedures (which may be revised from time to time) adopted by the Trust
Board (the ldquoValuation Proceduresrdquo) and in accordance with the 1940 Act A market
valuation generally means a valuation (i) obtained from an exchange an independent
pricing service (ldquoPricing Servicerdquo) or a major market maker (or dealer) or (ii) based on a
price quotation or other equivalent indication of value supplied by an exchange a Pricing
Service or a major market maker (or dealer) The information summarized below is
based on the Valuation Procedures as currently in effect however as noted above the
Valuation Procedures are amended from time to time and therefore such information is
subject to change
Certain securities including Floating Rate Debt Instruments in which the Fund
may invest will not be listed on any securities exchange or board of trade Such
securities will typically be bought and sold by institutional investors in individually
negotiated private transactions that function in many respects like an over-the-counter
SR-NASDAQ-2015-011 Amendment No 2 Page 47 of 64
secondary market although typically no formal market makers will exist Certain
securities particularly debt securities will have few or no trades or trade infrequently
and information regarding a specific security may not be widely available or may be
incomplete Accordingly determinations of the fair value of debt securities may be
based on infrequent and dated information Because there is less reliable objective data
available elements of judgment may play a greater role in valuation of debt securities
than for other types of securities Typically Floating Rate Debt Instruments and other
debt securities in which the Fund may invest (other than those described below) will be
valued using information provided by a Pricing Service Debt securities having a
remaining maturity of 60 days or less when purchased will be valued at cost adjusted for
amortization of premiums and accretion of discounts provided the Adviserrsquos pricing
committee (the ldquoPricing Committeerdquo) has determined that the use of amortized cost is an
appropriate reflection of fair value given market and issuer-specific conditions existing at
the time of the determination Overnight repurchase agreements will be valued at cost
and term repurchase agreements (ie those whose maturity exceeds seven days) will be
valued at the average of the bid quotations obtained daily from at least two recognized
dealers
Asset-backed and mortgage-backed securities will generally be valued by using a
Pricing Service If a Pricing Service does not cover a particular asset-backed or
mortgage-backed security or discontinues covering a particular asset-backed or
mortgage-backed security the security will be priced using broker quotes generally
provided by brokers that make or participate in markets in the security To derive values
Pricing Services and broker-dealers may use matrix pricing and valuation models as well
SR-NASDAQ-2015-011 Amendment No 2 Page 48 of 64
as recent market transactions for the same or similar assets As it deems appropriate the
Pricing Committee may determine that a Pricing Service price does not represent an
accurate value of an asset-backed or mortgage-backed security based on broker quotes it
receives a recent trade in the security by the Fund information from a portfolio manager
or other market information In the event that the Pricing Committee determines that the
Pricing Service price is unreliable or inaccurate based on such other information broker
quotes may be used Additionally if the Pricing Committee determines that the price of
an asset-backed or mortgage-backed security obtained from a Pricing Service and
available broker quotes is unreliable or inaccurate due to market conditions or other
reasons or if a Pricing Service price or broker quote is unavailable the security will be
valued using fair value pricing as described below
Equity securities listed on any exchange other than the Exchange will be valued at
the last sale price on the exchange on which they are principally traded on the business
day as of which such value is being determined Equity securities listed on the Exchange
will be valued at the official closing price on the business day as of which such value is
being determined If there has been no sale on such day or no official closing price in
the case of securities traded on the Exchange the securities will be valued using fair
value pricing as described below Equity securities traded on more than one securities
exchange will be valued at the last sale price or official closing price as applicable on
the business day as of which such value is being determined at the close of the exchange
representing the principal market for such securities
Exchange-traded options and futures contracts will be valued at the closing price
in the market where such contracts are principally traded
SR-NASDAQ-2015-011 Amendment No 2 Page 49 of 64
Certain securities including Floating Rate Debt Instruments in which the Fund
will invest will not be able to be priced by pre-established pricing methods Such
securities may be valued by the Trust Board or its delegate at fair value The use of fair
value pricing by the Fund will be governed by the Valuation Procedures and conducted in
accordance with the provisions of the 1940 Act Valuing the Fundrsquos securities using fair
value pricing will result in using prices for those securities that may differ from current
market valuations or official closing prices on the applicable exchange
Availability of Information
The Fundrsquos website (wwwftportfolioscom) which will be publicly available
prior to the public offering of Shares will include a form of the prospectus for the Fund
that may be downloaded The website will include the Sharesrsquo ticker CUSIP and
exchange information along with additional quantitative information updated on a daily
basis including for the Fund (1) daily trading volume the prior business dayrsquos reported
NAV and closing price mid-point of the bidask spread at the time of calculation of such
NAV (the ldquoBidAsk Pricerdquo)33 and a calculation of the premium and discount of the
BidAsk Price against the NAV and (2) data in chart format displaying the frequency
distribution of discounts and premiums of the daily BidAsk Price against the NAV
within appropriate ranges for each of the four previous calendar quarters On each
business day before commencement of trading in Shares in the Regular Market Session34
33 The BidAsk Price of the Fund will be determined using the mid-point of the highest bid and the lowest offer on the Exchange as of the time of calculation of the Fundrsquos NAV The records relating to BidAsk Prices will be retained by the Fund and its service providers
34 See Nasdaq Rule 4120(b)(4) (describing the three trading sessions on the Exchange (1) Pre-Market Session from 4 am to 930 am Eastern Time (2)
SR-NASDAQ-2015-011 Amendment No 2 Page 50 of 64
on the Exchange the Fund will disclose on its website the identities and quantities of the
portfolio of securities and other assets (the ldquoDisclosed Portfoliordquo as defined in Nasdaq
Rule 5735(c)(2)) held by the Fund that will form the basis for the Fundrsquos calculation of
NAV at the end of the business day 35 The Fundrsquos disclosure of derivative positions in
the Disclosed Portfolio will include information that market participants can use to value
these positions intraday On a daily basis the Fund will disclose on the Fundrsquos website
the following information regarding each portfolio holding as applicable to the type of
holding ticker symbol CUSIP number or other identifier if any a description of the
holding (including the type of holding) the identity of the security or other asset or
instrument underlying the holding if any for options the option strike price quantity
held (as measured by for example par value notional value or number of shares
contracts or units) maturity date if any coupon rate if any effective date if any market
value of the holding and percentage weighting of the holding in the Fundrsquos portfolio
The website information will be publicly available at no charge
In addition for the Fund an estimated value defined in Rule 5735(c)(3) as the
ldquoIntraday Indicative Valuerdquo that reflects an estimated intraday value of the Fundrsquos
Disclosed Portfolio will be disseminated Moreover the Intraday Indicative Value
Regular Market Session from 930 am to 4 pm or 415 pm Eastern Time and (3) Post-Market Session from 4 pm or 415 pm to 8 pm Eastern Time)
Under accounting procedures to be followed by the Fund trades made on the prior business day (ldquoTrdquo) will be booked and reflected in NAV on the current business day (ldquoT+1rdquo) Accordingly the Fund will be able to disclose at the beginning of the business day the portfolio that will form the basis for the NAV calculation at the end of the business day
35
SR-NASDAQ-2015-011 Amendment No 2 Page 51 of 64
available on the NASDAQ OMX Information LLC proprietary index data service36 will
be based upon the current value for the components of the Disclosed Portfolio and will be
updated and widely disseminated by one or more major market data vendors and broadly
displayed at least every 15 seconds during the Regular Market Session The Intraday
Indicative Value will be based on quotes and closing prices from the securitiesrsquo local
market and may not reflect events that occur subsequent to the local marketrsquos close
Premiums and discounts between the Intraday Indicative Value and the market price may
occur This should not be viewed as a ldquoreal timerdquo update of the NAV per Share of the
Fund which is calculated only once a day
The dissemination of the Intraday Indicative Value together with the Disclosed
Portfolio will allow investors to determine the value of the underlying portfolio of the
Fund on a daily basis and will provide a close estimate of that value throughout the
trading day
Investors will also be able to obtain the Fundrsquos Statement of Additional
Information (ldquoSAIrdquo) the Fundrsquos annual and semi-annual reports (together ldquoShareholder
Reportsrdquo) and its Form N-CSR and Form N-SAR filed twice a year The Fundrsquos SAI
and Shareholder Reports will be available free upon request from the Fund and those
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or
downloaded from the Commissionrsquos website at wwwsecgov Information regarding
Currently the NASDAQ OMX Global Index Data Service (ldquoGIDSrdquo) is the NASDAQ OMX global index data feed service offering real-time updates daily summary messages and access to widely followed indexes and Intraday Indicative Values for ETFs GIDS provides investment professionals with the daily information needed to track or trade NASDAQ OMX indexes listed ETFs or third-party partner indexes and ETFs
36
SR-NASDAQ-2015-011 Amendment No 2 Page 52 of 64
market price and trading volume of the Shares will be continually available on a real-time
basis throughout the day on brokersrsquo computer screens and other electronic services
Information regarding the previous dayrsquos closing price and trading volume information
for the Shares will be published daily in the financial section of newspapers Quotation
and last sale information for the Shares will be available via Nasdaq proprietary quote
and trade services as well as in accordance with the Unlisted Trading Privileges and the
Consolidated Tape Association (ldquoCTArdquo) plans for the Shares Quotation and last sale
information for the other ETFs in which the Fund will invest will be available via the
quote and trade services of their respective primary exchanges as well as in accordance
with the Unlisted Trading Privileges and the CTA plans as applicable Quotation and
last sale information for US exchange-traded options will be available via the Options
Price Reporting Authority Intraday executable price quotations on Floating Rate Debt
Instruments and other assets not traded on an exchange will be available from major
broker-dealer firms or market data vendors as well as from automated quotation systems
published or other public sources or online information services Additionally the Trade
Reporting and Compliance Engine (ldquoTRACErdquo) of the Financial Industry Regulatory
Authority (ldquoFINRArdquo) will be a source of price information for corporate bonds
privately-issued securities mortgage-backed securities and asset-backed securities to the
extent transactions in such securities are reported to TRACE37 For exchange-traded
Broker-dealers that are FINRA member firms have an obligation to report transactions in specified debt securities to TRACE to the extent required under applicable FINRA rules Generally such debt securities will have at issuance a maturity that exceeds one calendar year
37
SR-NASDAQ-2015-011 Amendment No 2 Page 53 of 64
assets intraday pricing information will be available directly from the applicable listing
exchange
Additional information regarding the Fund and the Shares including investment
strategies risks creation and redemption procedures fees Fund holdings disclosure
policies distributions and taxes will be included in the Registration Statement
Initial and Continued Listing
The Shares will be subject to Rule 5735 which sets forth the initial and continued
listing criteria applicable to Managed Fund Shares The Exchange represents that for
initial andor continued listing the Fund must be in compliance with Rule 10A-338 under
the Act A minimum of 100000 Shares will be outstanding at the commencement of
trading on the Exchange The Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the NAV and the
Disclosed Portfolio will be made available to all market participants at the same time
Trading Halts
With respect to trading halts the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading in the Shares of the Fund Nasdaq will
halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12) Trading may be
halted because of market conditions or for reasons that in the view of the Exchange
make trading in the Shares inadvisable These may include (1) the extent to which
trading is not occurring in the securities andor the other assets constituting the Disclosed
Portfolio of the Fund or (2) whether other unusual conditions or circumstances
See 17 CFR 24010A-3 38
SR-NASDAQ-2015-011 Amendment No 2 Page 54 of 64
detrimental to the maintenance of a fair and orderly market are present Trading in the
Shares also will be subject to Rule 5735(d)(2)(D) which sets forth circumstances under
which Shares of the Fund may be halted
Trading Rules
Nasdaq deems the Shares to be equity securities thus rendering trading in the
Shares subject to Nasdaqrsquos existing rules governing the trading of equity securities
Nasdaq will allow trading in the Shares from 400 am until 800 pm Eastern Time
The Exchange has appropriate rules to facilitate transactions in the Shares during all
trading sessions As provided in Nasdaq Rule 5735(b)(3) the minimum price variation
for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $001
Surveillance
The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws39 The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities laws
The surveillances referred to above generally focus on detecting securities trading
outside their normal patterns which could be indicative of manipulative or other violative
activity When such situations are detected surveillance analysis follows and
FINRA surveils trading on the Exchange pursuant to a regulatory services agreement The Exchange is responsible for FINRArsquos performance under this regulatory services agreement
39
SR-NASDAQ-2015-011 Amendment No 2 Page 55 of 64
investigations are opened where appropriate to review the behavior of all relevant
parties for all relevant trading violations
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 56 of 64
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
SR-NASDAQ-2015-011 Amendment No 2 Page 57 of 64
2 Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
SR-NASDAQ-2015-011 Amendment No 2 Page 58 of 64
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
SR-NASDAQ-2015-011 Amendment No 2 Page 59 of 64
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
SR-NASDAQ-2015-011 Amendment No 2 Page 60 of 64
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 61 of 64
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
SR-NASDAQ-2015-011 Amendment No 2 Page 62 of 64
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
B Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
C Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received From Members Participants or Others
Written comments were neither solicited nor received
III Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Within 45 days of the date of publication of this notice in the Federal Register or
within such longer period (i) as the Commission may designate up to 90 days of such date
if it finds such longer period to be appropriate and publishes its reasons for so finding or
(ii) as to which the Exchange consents the Commission shall (a) by order approve or
disapprove such proposed rule change or (b) institute proceedings to determine whether
the proposed rule change should be disapproved
SR-NASDAQ-2015-011 Amendment No 2 Page 63 of 64
IV Solicitation of Comments
Interested persons are invited to submit written data views and arguments
concerning the foregoing including whether the proposed rule change is consistent with
the Act Comments may be submitted by any of the following methods
Electronic comments
bull Use the Commissionrsquos Internet comment form
(httpwwwsecgovrulessroshtml) or
bull Send an e-mail to rule-commentssecgov Please include File Number
SR-NASDAQ-2015-011 on the subject line
Paper comments
bull Send paper comments in triplicate to Brent J Fields Secretary Securities and
Exchange Commission Station Place 100 F Street NE Washington DC
20549-9303
All submissions should refer to File Number SR-NASDAQ-2015-011 This file number
should be included on the subject line if e-mail is used To help the Commission process
and review your comments more efficiently please use only one method The
Commission will post all comments on the Commissionrsquos Internet website
httpwwwsecgovrulessroshtml
Copies of the submission all subsequent amendments all written statements with
respect to the proposed rule change that are filed with the Commission and all written
communications relating to the proposed rule change between the Commission and any
person other than those that may be withheld from the public in accordance with the
provisions of 5 USC 552 will be available for website viewing and printing in the
Commissionrsquos Public Reference Room 100 F Street NE Washington DC 20549 on
SR-NASDAQ-2015-011 Amendment No 2 Page 64 of 64
official business days between the hours of 1000 am and 300 pm Copies of the filing
also will be available for inspection and copying at the principal office of Nasdaq All
comments received will be posted without change the Commission does not edit
personal identifying information from submissions You should submit only information
that you wish to make available publicly
All submissions should refer to File Number SR-NASDAQ-2015-011 and should
be submitted on or before [insert date 21 days from publication in the Federal Register]
For the Commission by the Division of Trading and Markets pursuant to
delegated authority41
Kevin M OrsquoNeill Deputy Secretary
17 CFR 20030-3(a)(12) 41
SR-NASDAQ-2015-011 Amendment No 2 Page 46 of 64
Net Asset Value
The Fundrsquos NAV will be determined as of the close of trading (normally
400 pm Eastern Time) on each day the New York Stock Exchange is open for
business NAV will be calculated for the Fund by taking the market price of the Fundrsquos
total assets including interest or dividends accrued but not yet collected less all
liabilities and dividing such amount by the total number of Shares outstanding The
result rounded to the nearest cent will be the NAV per Share All valuations will be
subject to review by the Board of Trustees of the Trust (ldquoTrust Boardrdquo) or its delegate
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with valuation procedures (which may be revised from time to time) adopted by the Trust
Board (the ldquoValuation Proceduresrdquo) and in accordance with the 1940 Act A market
valuation generally means a valuation (i) obtained from an exchange an independent
pricing service (ldquoPricing Servicerdquo) or a major market maker (or dealer) or (ii) based on a
price quotation or other equivalent indication of value supplied by an exchange a Pricing
Service or a major market maker (or dealer) The information summarized below is
based on the Valuation Procedures as currently in effect however as noted above the
Valuation Procedures are amended from time to time and therefore such information is
subject to change
Certain securities including Floating Rate Debt Instruments in which the Fund
may invest will not be listed on any securities exchange or board of trade Such
securities will typically be bought and sold by institutional investors in individually
negotiated private transactions that function in many respects like an over-the-counter
SR-NASDAQ-2015-011 Amendment No 2 Page 47 of 64
secondary market although typically no formal market makers will exist Certain
securities particularly debt securities will have few or no trades or trade infrequently
and information regarding a specific security may not be widely available or may be
incomplete Accordingly determinations of the fair value of debt securities may be
based on infrequent and dated information Because there is less reliable objective data
available elements of judgment may play a greater role in valuation of debt securities
than for other types of securities Typically Floating Rate Debt Instruments and other
debt securities in which the Fund may invest (other than those described below) will be
valued using information provided by a Pricing Service Debt securities having a
remaining maturity of 60 days or less when purchased will be valued at cost adjusted for
amortization of premiums and accretion of discounts provided the Adviserrsquos pricing
committee (the ldquoPricing Committeerdquo) has determined that the use of amortized cost is an
appropriate reflection of fair value given market and issuer-specific conditions existing at
the time of the determination Overnight repurchase agreements will be valued at cost
and term repurchase agreements (ie those whose maturity exceeds seven days) will be
valued at the average of the bid quotations obtained daily from at least two recognized
dealers
Asset-backed and mortgage-backed securities will generally be valued by using a
Pricing Service If a Pricing Service does not cover a particular asset-backed or
mortgage-backed security or discontinues covering a particular asset-backed or
mortgage-backed security the security will be priced using broker quotes generally
provided by brokers that make or participate in markets in the security To derive values
Pricing Services and broker-dealers may use matrix pricing and valuation models as well
SR-NASDAQ-2015-011 Amendment No 2 Page 48 of 64
as recent market transactions for the same or similar assets As it deems appropriate the
Pricing Committee may determine that a Pricing Service price does not represent an
accurate value of an asset-backed or mortgage-backed security based on broker quotes it
receives a recent trade in the security by the Fund information from a portfolio manager
or other market information In the event that the Pricing Committee determines that the
Pricing Service price is unreliable or inaccurate based on such other information broker
quotes may be used Additionally if the Pricing Committee determines that the price of
an asset-backed or mortgage-backed security obtained from a Pricing Service and
available broker quotes is unreliable or inaccurate due to market conditions or other
reasons or if a Pricing Service price or broker quote is unavailable the security will be
valued using fair value pricing as described below
Equity securities listed on any exchange other than the Exchange will be valued at
the last sale price on the exchange on which they are principally traded on the business
day as of which such value is being determined Equity securities listed on the Exchange
will be valued at the official closing price on the business day as of which such value is
being determined If there has been no sale on such day or no official closing price in
the case of securities traded on the Exchange the securities will be valued using fair
value pricing as described below Equity securities traded on more than one securities
exchange will be valued at the last sale price or official closing price as applicable on
the business day as of which such value is being determined at the close of the exchange
representing the principal market for such securities
Exchange-traded options and futures contracts will be valued at the closing price
in the market where such contracts are principally traded
SR-NASDAQ-2015-011 Amendment No 2 Page 49 of 64
Certain securities including Floating Rate Debt Instruments in which the Fund
will invest will not be able to be priced by pre-established pricing methods Such
securities may be valued by the Trust Board or its delegate at fair value The use of fair
value pricing by the Fund will be governed by the Valuation Procedures and conducted in
accordance with the provisions of the 1940 Act Valuing the Fundrsquos securities using fair
value pricing will result in using prices for those securities that may differ from current
market valuations or official closing prices on the applicable exchange
Availability of Information
The Fundrsquos website (wwwftportfolioscom) which will be publicly available
prior to the public offering of Shares will include a form of the prospectus for the Fund
that may be downloaded The website will include the Sharesrsquo ticker CUSIP and
exchange information along with additional quantitative information updated on a daily
basis including for the Fund (1) daily trading volume the prior business dayrsquos reported
NAV and closing price mid-point of the bidask spread at the time of calculation of such
NAV (the ldquoBidAsk Pricerdquo)33 and a calculation of the premium and discount of the
BidAsk Price against the NAV and (2) data in chart format displaying the frequency
distribution of discounts and premiums of the daily BidAsk Price against the NAV
within appropriate ranges for each of the four previous calendar quarters On each
business day before commencement of trading in Shares in the Regular Market Session34
33 The BidAsk Price of the Fund will be determined using the mid-point of the highest bid and the lowest offer on the Exchange as of the time of calculation of the Fundrsquos NAV The records relating to BidAsk Prices will be retained by the Fund and its service providers
34 See Nasdaq Rule 4120(b)(4) (describing the three trading sessions on the Exchange (1) Pre-Market Session from 4 am to 930 am Eastern Time (2)
SR-NASDAQ-2015-011 Amendment No 2 Page 50 of 64
on the Exchange the Fund will disclose on its website the identities and quantities of the
portfolio of securities and other assets (the ldquoDisclosed Portfoliordquo as defined in Nasdaq
Rule 5735(c)(2)) held by the Fund that will form the basis for the Fundrsquos calculation of
NAV at the end of the business day 35 The Fundrsquos disclosure of derivative positions in
the Disclosed Portfolio will include information that market participants can use to value
these positions intraday On a daily basis the Fund will disclose on the Fundrsquos website
the following information regarding each portfolio holding as applicable to the type of
holding ticker symbol CUSIP number or other identifier if any a description of the
holding (including the type of holding) the identity of the security or other asset or
instrument underlying the holding if any for options the option strike price quantity
held (as measured by for example par value notional value or number of shares
contracts or units) maturity date if any coupon rate if any effective date if any market
value of the holding and percentage weighting of the holding in the Fundrsquos portfolio
The website information will be publicly available at no charge
In addition for the Fund an estimated value defined in Rule 5735(c)(3) as the
ldquoIntraday Indicative Valuerdquo that reflects an estimated intraday value of the Fundrsquos
Disclosed Portfolio will be disseminated Moreover the Intraday Indicative Value
Regular Market Session from 930 am to 4 pm or 415 pm Eastern Time and (3) Post-Market Session from 4 pm or 415 pm to 8 pm Eastern Time)
Under accounting procedures to be followed by the Fund trades made on the prior business day (ldquoTrdquo) will be booked and reflected in NAV on the current business day (ldquoT+1rdquo) Accordingly the Fund will be able to disclose at the beginning of the business day the portfolio that will form the basis for the NAV calculation at the end of the business day
35
SR-NASDAQ-2015-011 Amendment No 2 Page 51 of 64
available on the NASDAQ OMX Information LLC proprietary index data service36 will
be based upon the current value for the components of the Disclosed Portfolio and will be
updated and widely disseminated by one or more major market data vendors and broadly
displayed at least every 15 seconds during the Regular Market Session The Intraday
Indicative Value will be based on quotes and closing prices from the securitiesrsquo local
market and may not reflect events that occur subsequent to the local marketrsquos close
Premiums and discounts between the Intraday Indicative Value and the market price may
occur This should not be viewed as a ldquoreal timerdquo update of the NAV per Share of the
Fund which is calculated only once a day
The dissemination of the Intraday Indicative Value together with the Disclosed
Portfolio will allow investors to determine the value of the underlying portfolio of the
Fund on a daily basis and will provide a close estimate of that value throughout the
trading day
Investors will also be able to obtain the Fundrsquos Statement of Additional
Information (ldquoSAIrdquo) the Fundrsquos annual and semi-annual reports (together ldquoShareholder
Reportsrdquo) and its Form N-CSR and Form N-SAR filed twice a year The Fundrsquos SAI
and Shareholder Reports will be available free upon request from the Fund and those
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or
downloaded from the Commissionrsquos website at wwwsecgov Information regarding
Currently the NASDAQ OMX Global Index Data Service (ldquoGIDSrdquo) is the NASDAQ OMX global index data feed service offering real-time updates daily summary messages and access to widely followed indexes and Intraday Indicative Values for ETFs GIDS provides investment professionals with the daily information needed to track or trade NASDAQ OMX indexes listed ETFs or third-party partner indexes and ETFs
36
SR-NASDAQ-2015-011 Amendment No 2 Page 52 of 64
market price and trading volume of the Shares will be continually available on a real-time
basis throughout the day on brokersrsquo computer screens and other electronic services
Information regarding the previous dayrsquos closing price and trading volume information
for the Shares will be published daily in the financial section of newspapers Quotation
and last sale information for the Shares will be available via Nasdaq proprietary quote
and trade services as well as in accordance with the Unlisted Trading Privileges and the
Consolidated Tape Association (ldquoCTArdquo) plans for the Shares Quotation and last sale
information for the other ETFs in which the Fund will invest will be available via the
quote and trade services of their respective primary exchanges as well as in accordance
with the Unlisted Trading Privileges and the CTA plans as applicable Quotation and
last sale information for US exchange-traded options will be available via the Options
Price Reporting Authority Intraday executable price quotations on Floating Rate Debt
Instruments and other assets not traded on an exchange will be available from major
broker-dealer firms or market data vendors as well as from automated quotation systems
published or other public sources or online information services Additionally the Trade
Reporting and Compliance Engine (ldquoTRACErdquo) of the Financial Industry Regulatory
Authority (ldquoFINRArdquo) will be a source of price information for corporate bonds
privately-issued securities mortgage-backed securities and asset-backed securities to the
extent transactions in such securities are reported to TRACE37 For exchange-traded
Broker-dealers that are FINRA member firms have an obligation to report transactions in specified debt securities to TRACE to the extent required under applicable FINRA rules Generally such debt securities will have at issuance a maturity that exceeds one calendar year
37
SR-NASDAQ-2015-011 Amendment No 2 Page 53 of 64
assets intraday pricing information will be available directly from the applicable listing
exchange
Additional information regarding the Fund and the Shares including investment
strategies risks creation and redemption procedures fees Fund holdings disclosure
policies distributions and taxes will be included in the Registration Statement
Initial and Continued Listing
The Shares will be subject to Rule 5735 which sets forth the initial and continued
listing criteria applicable to Managed Fund Shares The Exchange represents that for
initial andor continued listing the Fund must be in compliance with Rule 10A-338 under
the Act A minimum of 100000 Shares will be outstanding at the commencement of
trading on the Exchange The Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the NAV and the
Disclosed Portfolio will be made available to all market participants at the same time
Trading Halts
With respect to trading halts the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading in the Shares of the Fund Nasdaq will
halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12) Trading may be
halted because of market conditions or for reasons that in the view of the Exchange
make trading in the Shares inadvisable These may include (1) the extent to which
trading is not occurring in the securities andor the other assets constituting the Disclosed
Portfolio of the Fund or (2) whether other unusual conditions or circumstances
See 17 CFR 24010A-3 38
SR-NASDAQ-2015-011 Amendment No 2 Page 54 of 64
detrimental to the maintenance of a fair and orderly market are present Trading in the
Shares also will be subject to Rule 5735(d)(2)(D) which sets forth circumstances under
which Shares of the Fund may be halted
Trading Rules
Nasdaq deems the Shares to be equity securities thus rendering trading in the
Shares subject to Nasdaqrsquos existing rules governing the trading of equity securities
Nasdaq will allow trading in the Shares from 400 am until 800 pm Eastern Time
The Exchange has appropriate rules to facilitate transactions in the Shares during all
trading sessions As provided in Nasdaq Rule 5735(b)(3) the minimum price variation
for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $001
Surveillance
The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws39 The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities laws
The surveillances referred to above generally focus on detecting securities trading
outside their normal patterns which could be indicative of manipulative or other violative
activity When such situations are detected surveillance analysis follows and
FINRA surveils trading on the Exchange pursuant to a regulatory services agreement The Exchange is responsible for FINRArsquos performance under this regulatory services agreement
39
SR-NASDAQ-2015-011 Amendment No 2 Page 55 of 64
investigations are opened where appropriate to review the behavior of all relevant
parties for all relevant trading violations
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 56 of 64
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
SR-NASDAQ-2015-011 Amendment No 2 Page 57 of 64
2 Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
SR-NASDAQ-2015-011 Amendment No 2 Page 58 of 64
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
SR-NASDAQ-2015-011 Amendment No 2 Page 59 of 64
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
SR-NASDAQ-2015-011 Amendment No 2 Page 60 of 64
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 61 of 64
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
SR-NASDAQ-2015-011 Amendment No 2 Page 62 of 64
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
B Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
C Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received From Members Participants or Others
Written comments were neither solicited nor received
III Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Within 45 days of the date of publication of this notice in the Federal Register or
within such longer period (i) as the Commission may designate up to 90 days of such date
if it finds such longer period to be appropriate and publishes its reasons for so finding or
(ii) as to which the Exchange consents the Commission shall (a) by order approve or
disapprove such proposed rule change or (b) institute proceedings to determine whether
the proposed rule change should be disapproved
SR-NASDAQ-2015-011 Amendment No 2 Page 63 of 64
IV Solicitation of Comments
Interested persons are invited to submit written data views and arguments
concerning the foregoing including whether the proposed rule change is consistent with
the Act Comments may be submitted by any of the following methods
Electronic comments
bull Use the Commissionrsquos Internet comment form
(httpwwwsecgovrulessroshtml) or
bull Send an e-mail to rule-commentssecgov Please include File Number
SR-NASDAQ-2015-011 on the subject line
Paper comments
bull Send paper comments in triplicate to Brent J Fields Secretary Securities and
Exchange Commission Station Place 100 F Street NE Washington DC
20549-9303
All submissions should refer to File Number SR-NASDAQ-2015-011 This file number
should be included on the subject line if e-mail is used To help the Commission process
and review your comments more efficiently please use only one method The
Commission will post all comments on the Commissionrsquos Internet website
httpwwwsecgovrulessroshtml
Copies of the submission all subsequent amendments all written statements with
respect to the proposed rule change that are filed with the Commission and all written
communications relating to the proposed rule change between the Commission and any
person other than those that may be withheld from the public in accordance with the
provisions of 5 USC 552 will be available for website viewing and printing in the
Commissionrsquos Public Reference Room 100 F Street NE Washington DC 20549 on
SR-NASDAQ-2015-011 Amendment No 2 Page 64 of 64
official business days between the hours of 1000 am and 300 pm Copies of the filing
also will be available for inspection and copying at the principal office of Nasdaq All
comments received will be posted without change the Commission does not edit
personal identifying information from submissions You should submit only information
that you wish to make available publicly
All submissions should refer to File Number SR-NASDAQ-2015-011 and should
be submitted on or before [insert date 21 days from publication in the Federal Register]
For the Commission by the Division of Trading and Markets pursuant to
delegated authority41
Kevin M OrsquoNeill Deputy Secretary
17 CFR 20030-3(a)(12) 41
SR-NASDAQ-2015-011 Amendment No 2 Page 47 of 64
secondary market although typically no formal market makers will exist Certain
securities particularly debt securities will have few or no trades or trade infrequently
and information regarding a specific security may not be widely available or may be
incomplete Accordingly determinations of the fair value of debt securities may be
based on infrequent and dated information Because there is less reliable objective data
available elements of judgment may play a greater role in valuation of debt securities
than for other types of securities Typically Floating Rate Debt Instruments and other
debt securities in which the Fund may invest (other than those described below) will be
valued using information provided by a Pricing Service Debt securities having a
remaining maturity of 60 days or less when purchased will be valued at cost adjusted for
amortization of premiums and accretion of discounts provided the Adviserrsquos pricing
committee (the ldquoPricing Committeerdquo) has determined that the use of amortized cost is an
appropriate reflection of fair value given market and issuer-specific conditions existing at
the time of the determination Overnight repurchase agreements will be valued at cost
and term repurchase agreements (ie those whose maturity exceeds seven days) will be
valued at the average of the bid quotations obtained daily from at least two recognized
dealers
Asset-backed and mortgage-backed securities will generally be valued by using a
Pricing Service If a Pricing Service does not cover a particular asset-backed or
mortgage-backed security or discontinues covering a particular asset-backed or
mortgage-backed security the security will be priced using broker quotes generally
provided by brokers that make or participate in markets in the security To derive values
Pricing Services and broker-dealers may use matrix pricing and valuation models as well
SR-NASDAQ-2015-011 Amendment No 2 Page 48 of 64
as recent market transactions for the same or similar assets As it deems appropriate the
Pricing Committee may determine that a Pricing Service price does not represent an
accurate value of an asset-backed or mortgage-backed security based on broker quotes it
receives a recent trade in the security by the Fund information from a portfolio manager
or other market information In the event that the Pricing Committee determines that the
Pricing Service price is unreliable or inaccurate based on such other information broker
quotes may be used Additionally if the Pricing Committee determines that the price of
an asset-backed or mortgage-backed security obtained from a Pricing Service and
available broker quotes is unreliable or inaccurate due to market conditions or other
reasons or if a Pricing Service price or broker quote is unavailable the security will be
valued using fair value pricing as described below
Equity securities listed on any exchange other than the Exchange will be valued at
the last sale price on the exchange on which they are principally traded on the business
day as of which such value is being determined Equity securities listed on the Exchange
will be valued at the official closing price on the business day as of which such value is
being determined If there has been no sale on such day or no official closing price in
the case of securities traded on the Exchange the securities will be valued using fair
value pricing as described below Equity securities traded on more than one securities
exchange will be valued at the last sale price or official closing price as applicable on
the business day as of which such value is being determined at the close of the exchange
representing the principal market for such securities
Exchange-traded options and futures contracts will be valued at the closing price
in the market where such contracts are principally traded
SR-NASDAQ-2015-011 Amendment No 2 Page 49 of 64
Certain securities including Floating Rate Debt Instruments in which the Fund
will invest will not be able to be priced by pre-established pricing methods Such
securities may be valued by the Trust Board or its delegate at fair value The use of fair
value pricing by the Fund will be governed by the Valuation Procedures and conducted in
accordance with the provisions of the 1940 Act Valuing the Fundrsquos securities using fair
value pricing will result in using prices for those securities that may differ from current
market valuations or official closing prices on the applicable exchange
Availability of Information
The Fundrsquos website (wwwftportfolioscom) which will be publicly available
prior to the public offering of Shares will include a form of the prospectus for the Fund
that may be downloaded The website will include the Sharesrsquo ticker CUSIP and
exchange information along with additional quantitative information updated on a daily
basis including for the Fund (1) daily trading volume the prior business dayrsquos reported
NAV and closing price mid-point of the bidask spread at the time of calculation of such
NAV (the ldquoBidAsk Pricerdquo)33 and a calculation of the premium and discount of the
BidAsk Price against the NAV and (2) data in chart format displaying the frequency
distribution of discounts and premiums of the daily BidAsk Price against the NAV
within appropriate ranges for each of the four previous calendar quarters On each
business day before commencement of trading in Shares in the Regular Market Session34
33 The BidAsk Price of the Fund will be determined using the mid-point of the highest bid and the lowest offer on the Exchange as of the time of calculation of the Fundrsquos NAV The records relating to BidAsk Prices will be retained by the Fund and its service providers
34 See Nasdaq Rule 4120(b)(4) (describing the three trading sessions on the Exchange (1) Pre-Market Session from 4 am to 930 am Eastern Time (2)
SR-NASDAQ-2015-011 Amendment No 2 Page 50 of 64
on the Exchange the Fund will disclose on its website the identities and quantities of the
portfolio of securities and other assets (the ldquoDisclosed Portfoliordquo as defined in Nasdaq
Rule 5735(c)(2)) held by the Fund that will form the basis for the Fundrsquos calculation of
NAV at the end of the business day 35 The Fundrsquos disclosure of derivative positions in
the Disclosed Portfolio will include information that market participants can use to value
these positions intraday On a daily basis the Fund will disclose on the Fundrsquos website
the following information regarding each portfolio holding as applicable to the type of
holding ticker symbol CUSIP number or other identifier if any a description of the
holding (including the type of holding) the identity of the security or other asset or
instrument underlying the holding if any for options the option strike price quantity
held (as measured by for example par value notional value or number of shares
contracts or units) maturity date if any coupon rate if any effective date if any market
value of the holding and percentage weighting of the holding in the Fundrsquos portfolio
The website information will be publicly available at no charge
In addition for the Fund an estimated value defined in Rule 5735(c)(3) as the
ldquoIntraday Indicative Valuerdquo that reflects an estimated intraday value of the Fundrsquos
Disclosed Portfolio will be disseminated Moreover the Intraday Indicative Value
Regular Market Session from 930 am to 4 pm or 415 pm Eastern Time and (3) Post-Market Session from 4 pm or 415 pm to 8 pm Eastern Time)
Under accounting procedures to be followed by the Fund trades made on the prior business day (ldquoTrdquo) will be booked and reflected in NAV on the current business day (ldquoT+1rdquo) Accordingly the Fund will be able to disclose at the beginning of the business day the portfolio that will form the basis for the NAV calculation at the end of the business day
35
SR-NASDAQ-2015-011 Amendment No 2 Page 51 of 64
available on the NASDAQ OMX Information LLC proprietary index data service36 will
be based upon the current value for the components of the Disclosed Portfolio and will be
updated and widely disseminated by one or more major market data vendors and broadly
displayed at least every 15 seconds during the Regular Market Session The Intraday
Indicative Value will be based on quotes and closing prices from the securitiesrsquo local
market and may not reflect events that occur subsequent to the local marketrsquos close
Premiums and discounts between the Intraday Indicative Value and the market price may
occur This should not be viewed as a ldquoreal timerdquo update of the NAV per Share of the
Fund which is calculated only once a day
The dissemination of the Intraday Indicative Value together with the Disclosed
Portfolio will allow investors to determine the value of the underlying portfolio of the
Fund on a daily basis and will provide a close estimate of that value throughout the
trading day
Investors will also be able to obtain the Fundrsquos Statement of Additional
Information (ldquoSAIrdquo) the Fundrsquos annual and semi-annual reports (together ldquoShareholder
Reportsrdquo) and its Form N-CSR and Form N-SAR filed twice a year The Fundrsquos SAI
and Shareholder Reports will be available free upon request from the Fund and those
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or
downloaded from the Commissionrsquos website at wwwsecgov Information regarding
Currently the NASDAQ OMX Global Index Data Service (ldquoGIDSrdquo) is the NASDAQ OMX global index data feed service offering real-time updates daily summary messages and access to widely followed indexes and Intraday Indicative Values for ETFs GIDS provides investment professionals with the daily information needed to track or trade NASDAQ OMX indexes listed ETFs or third-party partner indexes and ETFs
36
SR-NASDAQ-2015-011 Amendment No 2 Page 52 of 64
market price and trading volume of the Shares will be continually available on a real-time
basis throughout the day on brokersrsquo computer screens and other electronic services
Information regarding the previous dayrsquos closing price and trading volume information
for the Shares will be published daily in the financial section of newspapers Quotation
and last sale information for the Shares will be available via Nasdaq proprietary quote
and trade services as well as in accordance with the Unlisted Trading Privileges and the
Consolidated Tape Association (ldquoCTArdquo) plans for the Shares Quotation and last sale
information for the other ETFs in which the Fund will invest will be available via the
quote and trade services of their respective primary exchanges as well as in accordance
with the Unlisted Trading Privileges and the CTA plans as applicable Quotation and
last sale information for US exchange-traded options will be available via the Options
Price Reporting Authority Intraday executable price quotations on Floating Rate Debt
Instruments and other assets not traded on an exchange will be available from major
broker-dealer firms or market data vendors as well as from automated quotation systems
published or other public sources or online information services Additionally the Trade
Reporting and Compliance Engine (ldquoTRACErdquo) of the Financial Industry Regulatory
Authority (ldquoFINRArdquo) will be a source of price information for corporate bonds
privately-issued securities mortgage-backed securities and asset-backed securities to the
extent transactions in such securities are reported to TRACE37 For exchange-traded
Broker-dealers that are FINRA member firms have an obligation to report transactions in specified debt securities to TRACE to the extent required under applicable FINRA rules Generally such debt securities will have at issuance a maturity that exceeds one calendar year
37
SR-NASDAQ-2015-011 Amendment No 2 Page 53 of 64
assets intraday pricing information will be available directly from the applicable listing
exchange
Additional information regarding the Fund and the Shares including investment
strategies risks creation and redemption procedures fees Fund holdings disclosure
policies distributions and taxes will be included in the Registration Statement
Initial and Continued Listing
The Shares will be subject to Rule 5735 which sets forth the initial and continued
listing criteria applicable to Managed Fund Shares The Exchange represents that for
initial andor continued listing the Fund must be in compliance with Rule 10A-338 under
the Act A minimum of 100000 Shares will be outstanding at the commencement of
trading on the Exchange The Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the NAV and the
Disclosed Portfolio will be made available to all market participants at the same time
Trading Halts
With respect to trading halts the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading in the Shares of the Fund Nasdaq will
halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12) Trading may be
halted because of market conditions or for reasons that in the view of the Exchange
make trading in the Shares inadvisable These may include (1) the extent to which
trading is not occurring in the securities andor the other assets constituting the Disclosed
Portfolio of the Fund or (2) whether other unusual conditions or circumstances
See 17 CFR 24010A-3 38
SR-NASDAQ-2015-011 Amendment No 2 Page 54 of 64
detrimental to the maintenance of a fair and orderly market are present Trading in the
Shares also will be subject to Rule 5735(d)(2)(D) which sets forth circumstances under
which Shares of the Fund may be halted
Trading Rules
Nasdaq deems the Shares to be equity securities thus rendering trading in the
Shares subject to Nasdaqrsquos existing rules governing the trading of equity securities
Nasdaq will allow trading in the Shares from 400 am until 800 pm Eastern Time
The Exchange has appropriate rules to facilitate transactions in the Shares during all
trading sessions As provided in Nasdaq Rule 5735(b)(3) the minimum price variation
for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $001
Surveillance
The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws39 The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities laws
The surveillances referred to above generally focus on detecting securities trading
outside their normal patterns which could be indicative of manipulative or other violative
activity When such situations are detected surveillance analysis follows and
FINRA surveils trading on the Exchange pursuant to a regulatory services agreement The Exchange is responsible for FINRArsquos performance under this regulatory services agreement
39
SR-NASDAQ-2015-011 Amendment No 2 Page 55 of 64
investigations are opened where appropriate to review the behavior of all relevant
parties for all relevant trading violations
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 56 of 64
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
SR-NASDAQ-2015-011 Amendment No 2 Page 57 of 64
2 Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
SR-NASDAQ-2015-011 Amendment No 2 Page 58 of 64
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
SR-NASDAQ-2015-011 Amendment No 2 Page 59 of 64
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
SR-NASDAQ-2015-011 Amendment No 2 Page 60 of 64
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 61 of 64
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
SR-NASDAQ-2015-011 Amendment No 2 Page 62 of 64
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
B Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
C Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received From Members Participants or Others
Written comments were neither solicited nor received
III Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Within 45 days of the date of publication of this notice in the Federal Register or
within such longer period (i) as the Commission may designate up to 90 days of such date
if it finds such longer period to be appropriate and publishes its reasons for so finding or
(ii) as to which the Exchange consents the Commission shall (a) by order approve or
disapprove such proposed rule change or (b) institute proceedings to determine whether
the proposed rule change should be disapproved
SR-NASDAQ-2015-011 Amendment No 2 Page 63 of 64
IV Solicitation of Comments
Interested persons are invited to submit written data views and arguments
concerning the foregoing including whether the proposed rule change is consistent with
the Act Comments may be submitted by any of the following methods
Electronic comments
bull Use the Commissionrsquos Internet comment form
(httpwwwsecgovrulessroshtml) or
bull Send an e-mail to rule-commentssecgov Please include File Number
SR-NASDAQ-2015-011 on the subject line
Paper comments
bull Send paper comments in triplicate to Brent J Fields Secretary Securities and
Exchange Commission Station Place 100 F Street NE Washington DC
20549-9303
All submissions should refer to File Number SR-NASDAQ-2015-011 This file number
should be included on the subject line if e-mail is used To help the Commission process
and review your comments more efficiently please use only one method The
Commission will post all comments on the Commissionrsquos Internet website
httpwwwsecgovrulessroshtml
Copies of the submission all subsequent amendments all written statements with
respect to the proposed rule change that are filed with the Commission and all written
communications relating to the proposed rule change between the Commission and any
person other than those that may be withheld from the public in accordance with the
provisions of 5 USC 552 will be available for website viewing and printing in the
Commissionrsquos Public Reference Room 100 F Street NE Washington DC 20549 on
SR-NASDAQ-2015-011 Amendment No 2 Page 64 of 64
official business days between the hours of 1000 am and 300 pm Copies of the filing
also will be available for inspection and copying at the principal office of Nasdaq All
comments received will be posted without change the Commission does not edit
personal identifying information from submissions You should submit only information
that you wish to make available publicly
All submissions should refer to File Number SR-NASDAQ-2015-011 and should
be submitted on or before [insert date 21 days from publication in the Federal Register]
For the Commission by the Division of Trading and Markets pursuant to
delegated authority41
Kevin M OrsquoNeill Deputy Secretary
17 CFR 20030-3(a)(12) 41
SR-NASDAQ-2015-011 Amendment No 2 Page 48 of 64
as recent market transactions for the same or similar assets As it deems appropriate the
Pricing Committee may determine that a Pricing Service price does not represent an
accurate value of an asset-backed or mortgage-backed security based on broker quotes it
receives a recent trade in the security by the Fund information from a portfolio manager
or other market information In the event that the Pricing Committee determines that the
Pricing Service price is unreliable or inaccurate based on such other information broker
quotes may be used Additionally if the Pricing Committee determines that the price of
an asset-backed or mortgage-backed security obtained from a Pricing Service and
available broker quotes is unreliable or inaccurate due to market conditions or other
reasons or if a Pricing Service price or broker quote is unavailable the security will be
valued using fair value pricing as described below
Equity securities listed on any exchange other than the Exchange will be valued at
the last sale price on the exchange on which they are principally traded on the business
day as of which such value is being determined Equity securities listed on the Exchange
will be valued at the official closing price on the business day as of which such value is
being determined If there has been no sale on such day or no official closing price in
the case of securities traded on the Exchange the securities will be valued using fair
value pricing as described below Equity securities traded on more than one securities
exchange will be valued at the last sale price or official closing price as applicable on
the business day as of which such value is being determined at the close of the exchange
representing the principal market for such securities
Exchange-traded options and futures contracts will be valued at the closing price
in the market where such contracts are principally traded
SR-NASDAQ-2015-011 Amendment No 2 Page 49 of 64
Certain securities including Floating Rate Debt Instruments in which the Fund
will invest will not be able to be priced by pre-established pricing methods Such
securities may be valued by the Trust Board or its delegate at fair value The use of fair
value pricing by the Fund will be governed by the Valuation Procedures and conducted in
accordance with the provisions of the 1940 Act Valuing the Fundrsquos securities using fair
value pricing will result in using prices for those securities that may differ from current
market valuations or official closing prices on the applicable exchange
Availability of Information
The Fundrsquos website (wwwftportfolioscom) which will be publicly available
prior to the public offering of Shares will include a form of the prospectus for the Fund
that may be downloaded The website will include the Sharesrsquo ticker CUSIP and
exchange information along with additional quantitative information updated on a daily
basis including for the Fund (1) daily trading volume the prior business dayrsquos reported
NAV and closing price mid-point of the bidask spread at the time of calculation of such
NAV (the ldquoBidAsk Pricerdquo)33 and a calculation of the premium and discount of the
BidAsk Price against the NAV and (2) data in chart format displaying the frequency
distribution of discounts and premiums of the daily BidAsk Price against the NAV
within appropriate ranges for each of the four previous calendar quarters On each
business day before commencement of trading in Shares in the Regular Market Session34
33 The BidAsk Price of the Fund will be determined using the mid-point of the highest bid and the lowest offer on the Exchange as of the time of calculation of the Fundrsquos NAV The records relating to BidAsk Prices will be retained by the Fund and its service providers
34 See Nasdaq Rule 4120(b)(4) (describing the three trading sessions on the Exchange (1) Pre-Market Session from 4 am to 930 am Eastern Time (2)
SR-NASDAQ-2015-011 Amendment No 2 Page 50 of 64
on the Exchange the Fund will disclose on its website the identities and quantities of the
portfolio of securities and other assets (the ldquoDisclosed Portfoliordquo as defined in Nasdaq
Rule 5735(c)(2)) held by the Fund that will form the basis for the Fundrsquos calculation of
NAV at the end of the business day 35 The Fundrsquos disclosure of derivative positions in
the Disclosed Portfolio will include information that market participants can use to value
these positions intraday On a daily basis the Fund will disclose on the Fundrsquos website
the following information regarding each portfolio holding as applicable to the type of
holding ticker symbol CUSIP number or other identifier if any a description of the
holding (including the type of holding) the identity of the security or other asset or
instrument underlying the holding if any for options the option strike price quantity
held (as measured by for example par value notional value or number of shares
contracts or units) maturity date if any coupon rate if any effective date if any market
value of the holding and percentage weighting of the holding in the Fundrsquos portfolio
The website information will be publicly available at no charge
In addition for the Fund an estimated value defined in Rule 5735(c)(3) as the
ldquoIntraday Indicative Valuerdquo that reflects an estimated intraday value of the Fundrsquos
Disclosed Portfolio will be disseminated Moreover the Intraday Indicative Value
Regular Market Session from 930 am to 4 pm or 415 pm Eastern Time and (3) Post-Market Session from 4 pm or 415 pm to 8 pm Eastern Time)
Under accounting procedures to be followed by the Fund trades made on the prior business day (ldquoTrdquo) will be booked and reflected in NAV on the current business day (ldquoT+1rdquo) Accordingly the Fund will be able to disclose at the beginning of the business day the portfolio that will form the basis for the NAV calculation at the end of the business day
35
SR-NASDAQ-2015-011 Amendment No 2 Page 51 of 64
available on the NASDAQ OMX Information LLC proprietary index data service36 will
be based upon the current value for the components of the Disclosed Portfolio and will be
updated and widely disseminated by one or more major market data vendors and broadly
displayed at least every 15 seconds during the Regular Market Session The Intraday
Indicative Value will be based on quotes and closing prices from the securitiesrsquo local
market and may not reflect events that occur subsequent to the local marketrsquos close
Premiums and discounts between the Intraday Indicative Value and the market price may
occur This should not be viewed as a ldquoreal timerdquo update of the NAV per Share of the
Fund which is calculated only once a day
The dissemination of the Intraday Indicative Value together with the Disclosed
Portfolio will allow investors to determine the value of the underlying portfolio of the
Fund on a daily basis and will provide a close estimate of that value throughout the
trading day
Investors will also be able to obtain the Fundrsquos Statement of Additional
Information (ldquoSAIrdquo) the Fundrsquos annual and semi-annual reports (together ldquoShareholder
Reportsrdquo) and its Form N-CSR and Form N-SAR filed twice a year The Fundrsquos SAI
and Shareholder Reports will be available free upon request from the Fund and those
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or
downloaded from the Commissionrsquos website at wwwsecgov Information regarding
Currently the NASDAQ OMX Global Index Data Service (ldquoGIDSrdquo) is the NASDAQ OMX global index data feed service offering real-time updates daily summary messages and access to widely followed indexes and Intraday Indicative Values for ETFs GIDS provides investment professionals with the daily information needed to track or trade NASDAQ OMX indexes listed ETFs or third-party partner indexes and ETFs
36
SR-NASDAQ-2015-011 Amendment No 2 Page 52 of 64
market price and trading volume of the Shares will be continually available on a real-time
basis throughout the day on brokersrsquo computer screens and other electronic services
Information regarding the previous dayrsquos closing price and trading volume information
for the Shares will be published daily in the financial section of newspapers Quotation
and last sale information for the Shares will be available via Nasdaq proprietary quote
and trade services as well as in accordance with the Unlisted Trading Privileges and the
Consolidated Tape Association (ldquoCTArdquo) plans for the Shares Quotation and last sale
information for the other ETFs in which the Fund will invest will be available via the
quote and trade services of their respective primary exchanges as well as in accordance
with the Unlisted Trading Privileges and the CTA plans as applicable Quotation and
last sale information for US exchange-traded options will be available via the Options
Price Reporting Authority Intraday executable price quotations on Floating Rate Debt
Instruments and other assets not traded on an exchange will be available from major
broker-dealer firms or market data vendors as well as from automated quotation systems
published or other public sources or online information services Additionally the Trade
Reporting and Compliance Engine (ldquoTRACErdquo) of the Financial Industry Regulatory
Authority (ldquoFINRArdquo) will be a source of price information for corporate bonds
privately-issued securities mortgage-backed securities and asset-backed securities to the
extent transactions in such securities are reported to TRACE37 For exchange-traded
Broker-dealers that are FINRA member firms have an obligation to report transactions in specified debt securities to TRACE to the extent required under applicable FINRA rules Generally such debt securities will have at issuance a maturity that exceeds one calendar year
37
SR-NASDAQ-2015-011 Amendment No 2 Page 53 of 64
assets intraday pricing information will be available directly from the applicable listing
exchange
Additional information regarding the Fund and the Shares including investment
strategies risks creation and redemption procedures fees Fund holdings disclosure
policies distributions and taxes will be included in the Registration Statement
Initial and Continued Listing
The Shares will be subject to Rule 5735 which sets forth the initial and continued
listing criteria applicable to Managed Fund Shares The Exchange represents that for
initial andor continued listing the Fund must be in compliance with Rule 10A-338 under
the Act A minimum of 100000 Shares will be outstanding at the commencement of
trading on the Exchange The Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the NAV and the
Disclosed Portfolio will be made available to all market participants at the same time
Trading Halts
With respect to trading halts the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading in the Shares of the Fund Nasdaq will
halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12) Trading may be
halted because of market conditions or for reasons that in the view of the Exchange
make trading in the Shares inadvisable These may include (1) the extent to which
trading is not occurring in the securities andor the other assets constituting the Disclosed
Portfolio of the Fund or (2) whether other unusual conditions or circumstances
See 17 CFR 24010A-3 38
SR-NASDAQ-2015-011 Amendment No 2 Page 54 of 64
detrimental to the maintenance of a fair and orderly market are present Trading in the
Shares also will be subject to Rule 5735(d)(2)(D) which sets forth circumstances under
which Shares of the Fund may be halted
Trading Rules
Nasdaq deems the Shares to be equity securities thus rendering trading in the
Shares subject to Nasdaqrsquos existing rules governing the trading of equity securities
Nasdaq will allow trading in the Shares from 400 am until 800 pm Eastern Time
The Exchange has appropriate rules to facilitate transactions in the Shares during all
trading sessions As provided in Nasdaq Rule 5735(b)(3) the minimum price variation
for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $001
Surveillance
The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws39 The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities laws
The surveillances referred to above generally focus on detecting securities trading
outside their normal patterns which could be indicative of manipulative or other violative
activity When such situations are detected surveillance analysis follows and
FINRA surveils trading on the Exchange pursuant to a regulatory services agreement The Exchange is responsible for FINRArsquos performance under this regulatory services agreement
39
SR-NASDAQ-2015-011 Amendment No 2 Page 55 of 64
investigations are opened where appropriate to review the behavior of all relevant
parties for all relevant trading violations
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 56 of 64
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
SR-NASDAQ-2015-011 Amendment No 2 Page 57 of 64
2 Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
SR-NASDAQ-2015-011 Amendment No 2 Page 58 of 64
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
SR-NASDAQ-2015-011 Amendment No 2 Page 59 of 64
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
SR-NASDAQ-2015-011 Amendment No 2 Page 60 of 64
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 61 of 64
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
SR-NASDAQ-2015-011 Amendment No 2 Page 62 of 64
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
B Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
C Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received From Members Participants or Others
Written comments were neither solicited nor received
III Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Within 45 days of the date of publication of this notice in the Federal Register or
within such longer period (i) as the Commission may designate up to 90 days of such date
if it finds such longer period to be appropriate and publishes its reasons for so finding or
(ii) as to which the Exchange consents the Commission shall (a) by order approve or
disapprove such proposed rule change or (b) institute proceedings to determine whether
the proposed rule change should be disapproved
SR-NASDAQ-2015-011 Amendment No 2 Page 63 of 64
IV Solicitation of Comments
Interested persons are invited to submit written data views and arguments
concerning the foregoing including whether the proposed rule change is consistent with
the Act Comments may be submitted by any of the following methods
Electronic comments
bull Use the Commissionrsquos Internet comment form
(httpwwwsecgovrulessroshtml) or
bull Send an e-mail to rule-commentssecgov Please include File Number
SR-NASDAQ-2015-011 on the subject line
Paper comments
bull Send paper comments in triplicate to Brent J Fields Secretary Securities and
Exchange Commission Station Place 100 F Street NE Washington DC
20549-9303
All submissions should refer to File Number SR-NASDAQ-2015-011 This file number
should be included on the subject line if e-mail is used To help the Commission process
and review your comments more efficiently please use only one method The
Commission will post all comments on the Commissionrsquos Internet website
httpwwwsecgovrulessroshtml
Copies of the submission all subsequent amendments all written statements with
respect to the proposed rule change that are filed with the Commission and all written
communications relating to the proposed rule change between the Commission and any
person other than those that may be withheld from the public in accordance with the
provisions of 5 USC 552 will be available for website viewing and printing in the
Commissionrsquos Public Reference Room 100 F Street NE Washington DC 20549 on
SR-NASDAQ-2015-011 Amendment No 2 Page 64 of 64
official business days between the hours of 1000 am and 300 pm Copies of the filing
also will be available for inspection and copying at the principal office of Nasdaq All
comments received will be posted without change the Commission does not edit
personal identifying information from submissions You should submit only information
that you wish to make available publicly
All submissions should refer to File Number SR-NASDAQ-2015-011 and should
be submitted on or before [insert date 21 days from publication in the Federal Register]
For the Commission by the Division of Trading and Markets pursuant to
delegated authority41
Kevin M OrsquoNeill Deputy Secretary
17 CFR 20030-3(a)(12) 41
SR-NASDAQ-2015-011 Amendment No 2 Page 49 of 64
Certain securities including Floating Rate Debt Instruments in which the Fund
will invest will not be able to be priced by pre-established pricing methods Such
securities may be valued by the Trust Board or its delegate at fair value The use of fair
value pricing by the Fund will be governed by the Valuation Procedures and conducted in
accordance with the provisions of the 1940 Act Valuing the Fundrsquos securities using fair
value pricing will result in using prices for those securities that may differ from current
market valuations or official closing prices on the applicable exchange
Availability of Information
The Fundrsquos website (wwwftportfolioscom) which will be publicly available
prior to the public offering of Shares will include a form of the prospectus for the Fund
that may be downloaded The website will include the Sharesrsquo ticker CUSIP and
exchange information along with additional quantitative information updated on a daily
basis including for the Fund (1) daily trading volume the prior business dayrsquos reported
NAV and closing price mid-point of the bidask spread at the time of calculation of such
NAV (the ldquoBidAsk Pricerdquo)33 and a calculation of the premium and discount of the
BidAsk Price against the NAV and (2) data in chart format displaying the frequency
distribution of discounts and premiums of the daily BidAsk Price against the NAV
within appropriate ranges for each of the four previous calendar quarters On each
business day before commencement of trading in Shares in the Regular Market Session34
33 The BidAsk Price of the Fund will be determined using the mid-point of the highest bid and the lowest offer on the Exchange as of the time of calculation of the Fundrsquos NAV The records relating to BidAsk Prices will be retained by the Fund and its service providers
34 See Nasdaq Rule 4120(b)(4) (describing the three trading sessions on the Exchange (1) Pre-Market Session from 4 am to 930 am Eastern Time (2)
SR-NASDAQ-2015-011 Amendment No 2 Page 50 of 64
on the Exchange the Fund will disclose on its website the identities and quantities of the
portfolio of securities and other assets (the ldquoDisclosed Portfoliordquo as defined in Nasdaq
Rule 5735(c)(2)) held by the Fund that will form the basis for the Fundrsquos calculation of
NAV at the end of the business day 35 The Fundrsquos disclosure of derivative positions in
the Disclosed Portfolio will include information that market participants can use to value
these positions intraday On a daily basis the Fund will disclose on the Fundrsquos website
the following information regarding each portfolio holding as applicable to the type of
holding ticker symbol CUSIP number or other identifier if any a description of the
holding (including the type of holding) the identity of the security or other asset or
instrument underlying the holding if any for options the option strike price quantity
held (as measured by for example par value notional value or number of shares
contracts or units) maturity date if any coupon rate if any effective date if any market
value of the holding and percentage weighting of the holding in the Fundrsquos portfolio
The website information will be publicly available at no charge
In addition for the Fund an estimated value defined in Rule 5735(c)(3) as the
ldquoIntraday Indicative Valuerdquo that reflects an estimated intraday value of the Fundrsquos
Disclosed Portfolio will be disseminated Moreover the Intraday Indicative Value
Regular Market Session from 930 am to 4 pm or 415 pm Eastern Time and (3) Post-Market Session from 4 pm or 415 pm to 8 pm Eastern Time)
Under accounting procedures to be followed by the Fund trades made on the prior business day (ldquoTrdquo) will be booked and reflected in NAV on the current business day (ldquoT+1rdquo) Accordingly the Fund will be able to disclose at the beginning of the business day the portfolio that will form the basis for the NAV calculation at the end of the business day
35
SR-NASDAQ-2015-011 Amendment No 2 Page 51 of 64
available on the NASDAQ OMX Information LLC proprietary index data service36 will
be based upon the current value for the components of the Disclosed Portfolio and will be
updated and widely disseminated by one or more major market data vendors and broadly
displayed at least every 15 seconds during the Regular Market Session The Intraday
Indicative Value will be based on quotes and closing prices from the securitiesrsquo local
market and may not reflect events that occur subsequent to the local marketrsquos close
Premiums and discounts between the Intraday Indicative Value and the market price may
occur This should not be viewed as a ldquoreal timerdquo update of the NAV per Share of the
Fund which is calculated only once a day
The dissemination of the Intraday Indicative Value together with the Disclosed
Portfolio will allow investors to determine the value of the underlying portfolio of the
Fund on a daily basis and will provide a close estimate of that value throughout the
trading day
Investors will also be able to obtain the Fundrsquos Statement of Additional
Information (ldquoSAIrdquo) the Fundrsquos annual and semi-annual reports (together ldquoShareholder
Reportsrdquo) and its Form N-CSR and Form N-SAR filed twice a year The Fundrsquos SAI
and Shareholder Reports will be available free upon request from the Fund and those
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or
downloaded from the Commissionrsquos website at wwwsecgov Information regarding
Currently the NASDAQ OMX Global Index Data Service (ldquoGIDSrdquo) is the NASDAQ OMX global index data feed service offering real-time updates daily summary messages and access to widely followed indexes and Intraday Indicative Values for ETFs GIDS provides investment professionals with the daily information needed to track or trade NASDAQ OMX indexes listed ETFs or third-party partner indexes and ETFs
36
SR-NASDAQ-2015-011 Amendment No 2 Page 52 of 64
market price and trading volume of the Shares will be continually available on a real-time
basis throughout the day on brokersrsquo computer screens and other electronic services
Information regarding the previous dayrsquos closing price and trading volume information
for the Shares will be published daily in the financial section of newspapers Quotation
and last sale information for the Shares will be available via Nasdaq proprietary quote
and trade services as well as in accordance with the Unlisted Trading Privileges and the
Consolidated Tape Association (ldquoCTArdquo) plans for the Shares Quotation and last sale
information for the other ETFs in which the Fund will invest will be available via the
quote and trade services of their respective primary exchanges as well as in accordance
with the Unlisted Trading Privileges and the CTA plans as applicable Quotation and
last sale information for US exchange-traded options will be available via the Options
Price Reporting Authority Intraday executable price quotations on Floating Rate Debt
Instruments and other assets not traded on an exchange will be available from major
broker-dealer firms or market data vendors as well as from automated quotation systems
published or other public sources or online information services Additionally the Trade
Reporting and Compliance Engine (ldquoTRACErdquo) of the Financial Industry Regulatory
Authority (ldquoFINRArdquo) will be a source of price information for corporate bonds
privately-issued securities mortgage-backed securities and asset-backed securities to the
extent transactions in such securities are reported to TRACE37 For exchange-traded
Broker-dealers that are FINRA member firms have an obligation to report transactions in specified debt securities to TRACE to the extent required under applicable FINRA rules Generally such debt securities will have at issuance a maturity that exceeds one calendar year
37
SR-NASDAQ-2015-011 Amendment No 2 Page 53 of 64
assets intraday pricing information will be available directly from the applicable listing
exchange
Additional information regarding the Fund and the Shares including investment
strategies risks creation and redemption procedures fees Fund holdings disclosure
policies distributions and taxes will be included in the Registration Statement
Initial and Continued Listing
The Shares will be subject to Rule 5735 which sets forth the initial and continued
listing criteria applicable to Managed Fund Shares The Exchange represents that for
initial andor continued listing the Fund must be in compliance with Rule 10A-338 under
the Act A minimum of 100000 Shares will be outstanding at the commencement of
trading on the Exchange The Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the NAV and the
Disclosed Portfolio will be made available to all market participants at the same time
Trading Halts
With respect to trading halts the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading in the Shares of the Fund Nasdaq will
halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12) Trading may be
halted because of market conditions or for reasons that in the view of the Exchange
make trading in the Shares inadvisable These may include (1) the extent to which
trading is not occurring in the securities andor the other assets constituting the Disclosed
Portfolio of the Fund or (2) whether other unusual conditions or circumstances
See 17 CFR 24010A-3 38
SR-NASDAQ-2015-011 Amendment No 2 Page 54 of 64
detrimental to the maintenance of a fair and orderly market are present Trading in the
Shares also will be subject to Rule 5735(d)(2)(D) which sets forth circumstances under
which Shares of the Fund may be halted
Trading Rules
Nasdaq deems the Shares to be equity securities thus rendering trading in the
Shares subject to Nasdaqrsquos existing rules governing the trading of equity securities
Nasdaq will allow trading in the Shares from 400 am until 800 pm Eastern Time
The Exchange has appropriate rules to facilitate transactions in the Shares during all
trading sessions As provided in Nasdaq Rule 5735(b)(3) the minimum price variation
for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $001
Surveillance
The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws39 The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities laws
The surveillances referred to above generally focus on detecting securities trading
outside their normal patterns which could be indicative of manipulative or other violative
activity When such situations are detected surveillance analysis follows and
FINRA surveils trading on the Exchange pursuant to a regulatory services agreement The Exchange is responsible for FINRArsquos performance under this regulatory services agreement
39
SR-NASDAQ-2015-011 Amendment No 2 Page 55 of 64
investigations are opened where appropriate to review the behavior of all relevant
parties for all relevant trading violations
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 56 of 64
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
SR-NASDAQ-2015-011 Amendment No 2 Page 57 of 64
2 Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
SR-NASDAQ-2015-011 Amendment No 2 Page 58 of 64
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
SR-NASDAQ-2015-011 Amendment No 2 Page 59 of 64
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
SR-NASDAQ-2015-011 Amendment No 2 Page 60 of 64
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 61 of 64
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
SR-NASDAQ-2015-011 Amendment No 2 Page 62 of 64
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
B Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
C Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received From Members Participants or Others
Written comments were neither solicited nor received
III Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Within 45 days of the date of publication of this notice in the Federal Register or
within such longer period (i) as the Commission may designate up to 90 days of such date
if it finds such longer period to be appropriate and publishes its reasons for so finding or
(ii) as to which the Exchange consents the Commission shall (a) by order approve or
disapprove such proposed rule change or (b) institute proceedings to determine whether
the proposed rule change should be disapproved
SR-NASDAQ-2015-011 Amendment No 2 Page 63 of 64
IV Solicitation of Comments
Interested persons are invited to submit written data views and arguments
concerning the foregoing including whether the proposed rule change is consistent with
the Act Comments may be submitted by any of the following methods
Electronic comments
bull Use the Commissionrsquos Internet comment form
(httpwwwsecgovrulessroshtml) or
bull Send an e-mail to rule-commentssecgov Please include File Number
SR-NASDAQ-2015-011 on the subject line
Paper comments
bull Send paper comments in triplicate to Brent J Fields Secretary Securities and
Exchange Commission Station Place 100 F Street NE Washington DC
20549-9303
All submissions should refer to File Number SR-NASDAQ-2015-011 This file number
should be included on the subject line if e-mail is used To help the Commission process
and review your comments more efficiently please use only one method The
Commission will post all comments on the Commissionrsquos Internet website
httpwwwsecgovrulessroshtml
Copies of the submission all subsequent amendments all written statements with
respect to the proposed rule change that are filed with the Commission and all written
communications relating to the proposed rule change between the Commission and any
person other than those that may be withheld from the public in accordance with the
provisions of 5 USC 552 will be available for website viewing and printing in the
Commissionrsquos Public Reference Room 100 F Street NE Washington DC 20549 on
SR-NASDAQ-2015-011 Amendment No 2 Page 64 of 64
official business days between the hours of 1000 am and 300 pm Copies of the filing
also will be available for inspection and copying at the principal office of Nasdaq All
comments received will be posted without change the Commission does not edit
personal identifying information from submissions You should submit only information
that you wish to make available publicly
All submissions should refer to File Number SR-NASDAQ-2015-011 and should
be submitted on or before [insert date 21 days from publication in the Federal Register]
For the Commission by the Division of Trading and Markets pursuant to
delegated authority41
Kevin M OrsquoNeill Deputy Secretary
17 CFR 20030-3(a)(12) 41
SR-NASDAQ-2015-011 Amendment No 2 Page 50 of 64
on the Exchange the Fund will disclose on its website the identities and quantities of the
portfolio of securities and other assets (the ldquoDisclosed Portfoliordquo as defined in Nasdaq
Rule 5735(c)(2)) held by the Fund that will form the basis for the Fundrsquos calculation of
NAV at the end of the business day 35 The Fundrsquos disclosure of derivative positions in
the Disclosed Portfolio will include information that market participants can use to value
these positions intraday On a daily basis the Fund will disclose on the Fundrsquos website
the following information regarding each portfolio holding as applicable to the type of
holding ticker symbol CUSIP number or other identifier if any a description of the
holding (including the type of holding) the identity of the security or other asset or
instrument underlying the holding if any for options the option strike price quantity
held (as measured by for example par value notional value or number of shares
contracts or units) maturity date if any coupon rate if any effective date if any market
value of the holding and percentage weighting of the holding in the Fundrsquos portfolio
The website information will be publicly available at no charge
In addition for the Fund an estimated value defined in Rule 5735(c)(3) as the
ldquoIntraday Indicative Valuerdquo that reflects an estimated intraday value of the Fundrsquos
Disclosed Portfolio will be disseminated Moreover the Intraday Indicative Value
Regular Market Session from 930 am to 4 pm or 415 pm Eastern Time and (3) Post-Market Session from 4 pm or 415 pm to 8 pm Eastern Time)
Under accounting procedures to be followed by the Fund trades made on the prior business day (ldquoTrdquo) will be booked and reflected in NAV on the current business day (ldquoT+1rdquo) Accordingly the Fund will be able to disclose at the beginning of the business day the portfolio that will form the basis for the NAV calculation at the end of the business day
35
SR-NASDAQ-2015-011 Amendment No 2 Page 51 of 64
available on the NASDAQ OMX Information LLC proprietary index data service36 will
be based upon the current value for the components of the Disclosed Portfolio and will be
updated and widely disseminated by one or more major market data vendors and broadly
displayed at least every 15 seconds during the Regular Market Session The Intraday
Indicative Value will be based on quotes and closing prices from the securitiesrsquo local
market and may not reflect events that occur subsequent to the local marketrsquos close
Premiums and discounts between the Intraday Indicative Value and the market price may
occur This should not be viewed as a ldquoreal timerdquo update of the NAV per Share of the
Fund which is calculated only once a day
The dissemination of the Intraday Indicative Value together with the Disclosed
Portfolio will allow investors to determine the value of the underlying portfolio of the
Fund on a daily basis and will provide a close estimate of that value throughout the
trading day
Investors will also be able to obtain the Fundrsquos Statement of Additional
Information (ldquoSAIrdquo) the Fundrsquos annual and semi-annual reports (together ldquoShareholder
Reportsrdquo) and its Form N-CSR and Form N-SAR filed twice a year The Fundrsquos SAI
and Shareholder Reports will be available free upon request from the Fund and those
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or
downloaded from the Commissionrsquos website at wwwsecgov Information regarding
Currently the NASDAQ OMX Global Index Data Service (ldquoGIDSrdquo) is the NASDAQ OMX global index data feed service offering real-time updates daily summary messages and access to widely followed indexes and Intraday Indicative Values for ETFs GIDS provides investment professionals with the daily information needed to track or trade NASDAQ OMX indexes listed ETFs or third-party partner indexes and ETFs
36
SR-NASDAQ-2015-011 Amendment No 2 Page 52 of 64
market price and trading volume of the Shares will be continually available on a real-time
basis throughout the day on brokersrsquo computer screens and other electronic services
Information regarding the previous dayrsquos closing price and trading volume information
for the Shares will be published daily in the financial section of newspapers Quotation
and last sale information for the Shares will be available via Nasdaq proprietary quote
and trade services as well as in accordance with the Unlisted Trading Privileges and the
Consolidated Tape Association (ldquoCTArdquo) plans for the Shares Quotation and last sale
information for the other ETFs in which the Fund will invest will be available via the
quote and trade services of their respective primary exchanges as well as in accordance
with the Unlisted Trading Privileges and the CTA plans as applicable Quotation and
last sale information for US exchange-traded options will be available via the Options
Price Reporting Authority Intraday executable price quotations on Floating Rate Debt
Instruments and other assets not traded on an exchange will be available from major
broker-dealer firms or market data vendors as well as from automated quotation systems
published or other public sources or online information services Additionally the Trade
Reporting and Compliance Engine (ldquoTRACErdquo) of the Financial Industry Regulatory
Authority (ldquoFINRArdquo) will be a source of price information for corporate bonds
privately-issued securities mortgage-backed securities and asset-backed securities to the
extent transactions in such securities are reported to TRACE37 For exchange-traded
Broker-dealers that are FINRA member firms have an obligation to report transactions in specified debt securities to TRACE to the extent required under applicable FINRA rules Generally such debt securities will have at issuance a maturity that exceeds one calendar year
37
SR-NASDAQ-2015-011 Amendment No 2 Page 53 of 64
assets intraday pricing information will be available directly from the applicable listing
exchange
Additional information regarding the Fund and the Shares including investment
strategies risks creation and redemption procedures fees Fund holdings disclosure
policies distributions and taxes will be included in the Registration Statement
Initial and Continued Listing
The Shares will be subject to Rule 5735 which sets forth the initial and continued
listing criteria applicable to Managed Fund Shares The Exchange represents that for
initial andor continued listing the Fund must be in compliance with Rule 10A-338 under
the Act A minimum of 100000 Shares will be outstanding at the commencement of
trading on the Exchange The Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the NAV and the
Disclosed Portfolio will be made available to all market participants at the same time
Trading Halts
With respect to trading halts the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading in the Shares of the Fund Nasdaq will
halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12) Trading may be
halted because of market conditions or for reasons that in the view of the Exchange
make trading in the Shares inadvisable These may include (1) the extent to which
trading is not occurring in the securities andor the other assets constituting the Disclosed
Portfolio of the Fund or (2) whether other unusual conditions or circumstances
See 17 CFR 24010A-3 38
SR-NASDAQ-2015-011 Amendment No 2 Page 54 of 64
detrimental to the maintenance of a fair and orderly market are present Trading in the
Shares also will be subject to Rule 5735(d)(2)(D) which sets forth circumstances under
which Shares of the Fund may be halted
Trading Rules
Nasdaq deems the Shares to be equity securities thus rendering trading in the
Shares subject to Nasdaqrsquos existing rules governing the trading of equity securities
Nasdaq will allow trading in the Shares from 400 am until 800 pm Eastern Time
The Exchange has appropriate rules to facilitate transactions in the Shares during all
trading sessions As provided in Nasdaq Rule 5735(b)(3) the minimum price variation
for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $001
Surveillance
The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws39 The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities laws
The surveillances referred to above generally focus on detecting securities trading
outside their normal patterns which could be indicative of manipulative or other violative
activity When such situations are detected surveillance analysis follows and
FINRA surveils trading on the Exchange pursuant to a regulatory services agreement The Exchange is responsible for FINRArsquos performance under this regulatory services agreement
39
SR-NASDAQ-2015-011 Amendment No 2 Page 55 of 64
investigations are opened where appropriate to review the behavior of all relevant
parties for all relevant trading violations
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 56 of 64
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
SR-NASDAQ-2015-011 Amendment No 2 Page 57 of 64
2 Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
SR-NASDAQ-2015-011 Amendment No 2 Page 58 of 64
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
SR-NASDAQ-2015-011 Amendment No 2 Page 59 of 64
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
SR-NASDAQ-2015-011 Amendment No 2 Page 60 of 64
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 61 of 64
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
SR-NASDAQ-2015-011 Amendment No 2 Page 62 of 64
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
B Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
C Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received From Members Participants or Others
Written comments were neither solicited nor received
III Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Within 45 days of the date of publication of this notice in the Federal Register or
within such longer period (i) as the Commission may designate up to 90 days of such date
if it finds such longer period to be appropriate and publishes its reasons for so finding or
(ii) as to which the Exchange consents the Commission shall (a) by order approve or
disapprove such proposed rule change or (b) institute proceedings to determine whether
the proposed rule change should be disapproved
SR-NASDAQ-2015-011 Amendment No 2 Page 63 of 64
IV Solicitation of Comments
Interested persons are invited to submit written data views and arguments
concerning the foregoing including whether the proposed rule change is consistent with
the Act Comments may be submitted by any of the following methods
Electronic comments
bull Use the Commissionrsquos Internet comment form
(httpwwwsecgovrulessroshtml) or
bull Send an e-mail to rule-commentssecgov Please include File Number
SR-NASDAQ-2015-011 on the subject line
Paper comments
bull Send paper comments in triplicate to Brent J Fields Secretary Securities and
Exchange Commission Station Place 100 F Street NE Washington DC
20549-9303
All submissions should refer to File Number SR-NASDAQ-2015-011 This file number
should be included on the subject line if e-mail is used To help the Commission process
and review your comments more efficiently please use only one method The
Commission will post all comments on the Commissionrsquos Internet website
httpwwwsecgovrulessroshtml
Copies of the submission all subsequent amendments all written statements with
respect to the proposed rule change that are filed with the Commission and all written
communications relating to the proposed rule change between the Commission and any
person other than those that may be withheld from the public in accordance with the
provisions of 5 USC 552 will be available for website viewing and printing in the
Commissionrsquos Public Reference Room 100 F Street NE Washington DC 20549 on
SR-NASDAQ-2015-011 Amendment No 2 Page 64 of 64
official business days between the hours of 1000 am and 300 pm Copies of the filing
also will be available for inspection and copying at the principal office of Nasdaq All
comments received will be posted without change the Commission does not edit
personal identifying information from submissions You should submit only information
that you wish to make available publicly
All submissions should refer to File Number SR-NASDAQ-2015-011 and should
be submitted on or before [insert date 21 days from publication in the Federal Register]
For the Commission by the Division of Trading and Markets pursuant to
delegated authority41
Kevin M OrsquoNeill Deputy Secretary
17 CFR 20030-3(a)(12) 41
SR-NASDAQ-2015-011 Amendment No 2 Page 51 of 64
available on the NASDAQ OMX Information LLC proprietary index data service36 will
be based upon the current value for the components of the Disclosed Portfolio and will be
updated and widely disseminated by one or more major market data vendors and broadly
displayed at least every 15 seconds during the Regular Market Session The Intraday
Indicative Value will be based on quotes and closing prices from the securitiesrsquo local
market and may not reflect events that occur subsequent to the local marketrsquos close
Premiums and discounts between the Intraday Indicative Value and the market price may
occur This should not be viewed as a ldquoreal timerdquo update of the NAV per Share of the
Fund which is calculated only once a day
The dissemination of the Intraday Indicative Value together with the Disclosed
Portfolio will allow investors to determine the value of the underlying portfolio of the
Fund on a daily basis and will provide a close estimate of that value throughout the
trading day
Investors will also be able to obtain the Fundrsquos Statement of Additional
Information (ldquoSAIrdquo) the Fundrsquos annual and semi-annual reports (together ldquoShareholder
Reportsrdquo) and its Form N-CSR and Form N-SAR filed twice a year The Fundrsquos SAI
and Shareholder Reports will be available free upon request from the Fund and those
documents and the Form N-CSR and Form N-SAR may be viewed on-screen or
downloaded from the Commissionrsquos website at wwwsecgov Information regarding
Currently the NASDAQ OMX Global Index Data Service (ldquoGIDSrdquo) is the NASDAQ OMX global index data feed service offering real-time updates daily summary messages and access to widely followed indexes and Intraday Indicative Values for ETFs GIDS provides investment professionals with the daily information needed to track or trade NASDAQ OMX indexes listed ETFs or third-party partner indexes and ETFs
36
SR-NASDAQ-2015-011 Amendment No 2 Page 52 of 64
market price and trading volume of the Shares will be continually available on a real-time
basis throughout the day on brokersrsquo computer screens and other electronic services
Information regarding the previous dayrsquos closing price and trading volume information
for the Shares will be published daily in the financial section of newspapers Quotation
and last sale information for the Shares will be available via Nasdaq proprietary quote
and trade services as well as in accordance with the Unlisted Trading Privileges and the
Consolidated Tape Association (ldquoCTArdquo) plans for the Shares Quotation and last sale
information for the other ETFs in which the Fund will invest will be available via the
quote and trade services of their respective primary exchanges as well as in accordance
with the Unlisted Trading Privileges and the CTA plans as applicable Quotation and
last sale information for US exchange-traded options will be available via the Options
Price Reporting Authority Intraday executable price quotations on Floating Rate Debt
Instruments and other assets not traded on an exchange will be available from major
broker-dealer firms or market data vendors as well as from automated quotation systems
published or other public sources or online information services Additionally the Trade
Reporting and Compliance Engine (ldquoTRACErdquo) of the Financial Industry Regulatory
Authority (ldquoFINRArdquo) will be a source of price information for corporate bonds
privately-issued securities mortgage-backed securities and asset-backed securities to the
extent transactions in such securities are reported to TRACE37 For exchange-traded
Broker-dealers that are FINRA member firms have an obligation to report transactions in specified debt securities to TRACE to the extent required under applicable FINRA rules Generally such debt securities will have at issuance a maturity that exceeds one calendar year
37
SR-NASDAQ-2015-011 Amendment No 2 Page 53 of 64
assets intraday pricing information will be available directly from the applicable listing
exchange
Additional information regarding the Fund and the Shares including investment
strategies risks creation and redemption procedures fees Fund holdings disclosure
policies distributions and taxes will be included in the Registration Statement
Initial and Continued Listing
The Shares will be subject to Rule 5735 which sets forth the initial and continued
listing criteria applicable to Managed Fund Shares The Exchange represents that for
initial andor continued listing the Fund must be in compliance with Rule 10A-338 under
the Act A minimum of 100000 Shares will be outstanding at the commencement of
trading on the Exchange The Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the NAV and the
Disclosed Portfolio will be made available to all market participants at the same time
Trading Halts
With respect to trading halts the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading in the Shares of the Fund Nasdaq will
halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12) Trading may be
halted because of market conditions or for reasons that in the view of the Exchange
make trading in the Shares inadvisable These may include (1) the extent to which
trading is not occurring in the securities andor the other assets constituting the Disclosed
Portfolio of the Fund or (2) whether other unusual conditions or circumstances
See 17 CFR 24010A-3 38
SR-NASDAQ-2015-011 Amendment No 2 Page 54 of 64
detrimental to the maintenance of a fair and orderly market are present Trading in the
Shares also will be subject to Rule 5735(d)(2)(D) which sets forth circumstances under
which Shares of the Fund may be halted
Trading Rules
Nasdaq deems the Shares to be equity securities thus rendering trading in the
Shares subject to Nasdaqrsquos existing rules governing the trading of equity securities
Nasdaq will allow trading in the Shares from 400 am until 800 pm Eastern Time
The Exchange has appropriate rules to facilitate transactions in the Shares during all
trading sessions As provided in Nasdaq Rule 5735(b)(3) the minimum price variation
for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $001
Surveillance
The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws39 The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities laws
The surveillances referred to above generally focus on detecting securities trading
outside their normal patterns which could be indicative of manipulative or other violative
activity When such situations are detected surveillance analysis follows and
FINRA surveils trading on the Exchange pursuant to a regulatory services agreement The Exchange is responsible for FINRArsquos performance under this regulatory services agreement
39
SR-NASDAQ-2015-011 Amendment No 2 Page 55 of 64
investigations are opened where appropriate to review the behavior of all relevant
parties for all relevant trading violations
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 56 of 64
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
SR-NASDAQ-2015-011 Amendment No 2 Page 57 of 64
2 Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
SR-NASDAQ-2015-011 Amendment No 2 Page 58 of 64
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
SR-NASDAQ-2015-011 Amendment No 2 Page 59 of 64
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
SR-NASDAQ-2015-011 Amendment No 2 Page 60 of 64
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 61 of 64
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
SR-NASDAQ-2015-011 Amendment No 2 Page 62 of 64
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
B Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
C Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received From Members Participants or Others
Written comments were neither solicited nor received
III Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Within 45 days of the date of publication of this notice in the Federal Register or
within such longer period (i) as the Commission may designate up to 90 days of such date
if it finds such longer period to be appropriate and publishes its reasons for so finding or
(ii) as to which the Exchange consents the Commission shall (a) by order approve or
disapprove such proposed rule change or (b) institute proceedings to determine whether
the proposed rule change should be disapproved
SR-NASDAQ-2015-011 Amendment No 2 Page 63 of 64
IV Solicitation of Comments
Interested persons are invited to submit written data views and arguments
concerning the foregoing including whether the proposed rule change is consistent with
the Act Comments may be submitted by any of the following methods
Electronic comments
bull Use the Commissionrsquos Internet comment form
(httpwwwsecgovrulessroshtml) or
bull Send an e-mail to rule-commentssecgov Please include File Number
SR-NASDAQ-2015-011 on the subject line
Paper comments
bull Send paper comments in triplicate to Brent J Fields Secretary Securities and
Exchange Commission Station Place 100 F Street NE Washington DC
20549-9303
All submissions should refer to File Number SR-NASDAQ-2015-011 This file number
should be included on the subject line if e-mail is used To help the Commission process
and review your comments more efficiently please use only one method The
Commission will post all comments on the Commissionrsquos Internet website
httpwwwsecgovrulessroshtml
Copies of the submission all subsequent amendments all written statements with
respect to the proposed rule change that are filed with the Commission and all written
communications relating to the proposed rule change between the Commission and any
person other than those that may be withheld from the public in accordance with the
provisions of 5 USC 552 will be available for website viewing and printing in the
Commissionrsquos Public Reference Room 100 F Street NE Washington DC 20549 on
SR-NASDAQ-2015-011 Amendment No 2 Page 64 of 64
official business days between the hours of 1000 am and 300 pm Copies of the filing
also will be available for inspection and copying at the principal office of Nasdaq All
comments received will be posted without change the Commission does not edit
personal identifying information from submissions You should submit only information
that you wish to make available publicly
All submissions should refer to File Number SR-NASDAQ-2015-011 and should
be submitted on or before [insert date 21 days from publication in the Federal Register]
For the Commission by the Division of Trading and Markets pursuant to
delegated authority41
Kevin M OrsquoNeill Deputy Secretary
17 CFR 20030-3(a)(12) 41
SR-NASDAQ-2015-011 Amendment No 2 Page 52 of 64
market price and trading volume of the Shares will be continually available on a real-time
basis throughout the day on brokersrsquo computer screens and other electronic services
Information regarding the previous dayrsquos closing price and trading volume information
for the Shares will be published daily in the financial section of newspapers Quotation
and last sale information for the Shares will be available via Nasdaq proprietary quote
and trade services as well as in accordance with the Unlisted Trading Privileges and the
Consolidated Tape Association (ldquoCTArdquo) plans for the Shares Quotation and last sale
information for the other ETFs in which the Fund will invest will be available via the
quote and trade services of their respective primary exchanges as well as in accordance
with the Unlisted Trading Privileges and the CTA plans as applicable Quotation and
last sale information for US exchange-traded options will be available via the Options
Price Reporting Authority Intraday executable price quotations on Floating Rate Debt
Instruments and other assets not traded on an exchange will be available from major
broker-dealer firms or market data vendors as well as from automated quotation systems
published or other public sources or online information services Additionally the Trade
Reporting and Compliance Engine (ldquoTRACErdquo) of the Financial Industry Regulatory
Authority (ldquoFINRArdquo) will be a source of price information for corporate bonds
privately-issued securities mortgage-backed securities and asset-backed securities to the
extent transactions in such securities are reported to TRACE37 For exchange-traded
Broker-dealers that are FINRA member firms have an obligation to report transactions in specified debt securities to TRACE to the extent required under applicable FINRA rules Generally such debt securities will have at issuance a maturity that exceeds one calendar year
37
SR-NASDAQ-2015-011 Amendment No 2 Page 53 of 64
assets intraday pricing information will be available directly from the applicable listing
exchange
Additional information regarding the Fund and the Shares including investment
strategies risks creation and redemption procedures fees Fund holdings disclosure
policies distributions and taxes will be included in the Registration Statement
Initial and Continued Listing
The Shares will be subject to Rule 5735 which sets forth the initial and continued
listing criteria applicable to Managed Fund Shares The Exchange represents that for
initial andor continued listing the Fund must be in compliance with Rule 10A-338 under
the Act A minimum of 100000 Shares will be outstanding at the commencement of
trading on the Exchange The Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the NAV and the
Disclosed Portfolio will be made available to all market participants at the same time
Trading Halts
With respect to trading halts the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading in the Shares of the Fund Nasdaq will
halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12) Trading may be
halted because of market conditions or for reasons that in the view of the Exchange
make trading in the Shares inadvisable These may include (1) the extent to which
trading is not occurring in the securities andor the other assets constituting the Disclosed
Portfolio of the Fund or (2) whether other unusual conditions or circumstances
See 17 CFR 24010A-3 38
SR-NASDAQ-2015-011 Amendment No 2 Page 54 of 64
detrimental to the maintenance of a fair and orderly market are present Trading in the
Shares also will be subject to Rule 5735(d)(2)(D) which sets forth circumstances under
which Shares of the Fund may be halted
Trading Rules
Nasdaq deems the Shares to be equity securities thus rendering trading in the
Shares subject to Nasdaqrsquos existing rules governing the trading of equity securities
Nasdaq will allow trading in the Shares from 400 am until 800 pm Eastern Time
The Exchange has appropriate rules to facilitate transactions in the Shares during all
trading sessions As provided in Nasdaq Rule 5735(b)(3) the minimum price variation
for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $001
Surveillance
The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws39 The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities laws
The surveillances referred to above generally focus on detecting securities trading
outside their normal patterns which could be indicative of manipulative or other violative
activity When such situations are detected surveillance analysis follows and
FINRA surveils trading on the Exchange pursuant to a regulatory services agreement The Exchange is responsible for FINRArsquos performance under this regulatory services agreement
39
SR-NASDAQ-2015-011 Amendment No 2 Page 55 of 64
investigations are opened where appropriate to review the behavior of all relevant
parties for all relevant trading violations
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 56 of 64
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
SR-NASDAQ-2015-011 Amendment No 2 Page 57 of 64
2 Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
SR-NASDAQ-2015-011 Amendment No 2 Page 58 of 64
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
SR-NASDAQ-2015-011 Amendment No 2 Page 59 of 64
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
SR-NASDAQ-2015-011 Amendment No 2 Page 60 of 64
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 61 of 64
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
SR-NASDAQ-2015-011 Amendment No 2 Page 62 of 64
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
B Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
C Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received From Members Participants or Others
Written comments were neither solicited nor received
III Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Within 45 days of the date of publication of this notice in the Federal Register or
within such longer period (i) as the Commission may designate up to 90 days of such date
if it finds such longer period to be appropriate and publishes its reasons for so finding or
(ii) as to which the Exchange consents the Commission shall (a) by order approve or
disapprove such proposed rule change or (b) institute proceedings to determine whether
the proposed rule change should be disapproved
SR-NASDAQ-2015-011 Amendment No 2 Page 63 of 64
IV Solicitation of Comments
Interested persons are invited to submit written data views and arguments
concerning the foregoing including whether the proposed rule change is consistent with
the Act Comments may be submitted by any of the following methods
Electronic comments
bull Use the Commissionrsquos Internet comment form
(httpwwwsecgovrulessroshtml) or
bull Send an e-mail to rule-commentssecgov Please include File Number
SR-NASDAQ-2015-011 on the subject line
Paper comments
bull Send paper comments in triplicate to Brent J Fields Secretary Securities and
Exchange Commission Station Place 100 F Street NE Washington DC
20549-9303
All submissions should refer to File Number SR-NASDAQ-2015-011 This file number
should be included on the subject line if e-mail is used To help the Commission process
and review your comments more efficiently please use only one method The
Commission will post all comments on the Commissionrsquos Internet website
httpwwwsecgovrulessroshtml
Copies of the submission all subsequent amendments all written statements with
respect to the proposed rule change that are filed with the Commission and all written
communications relating to the proposed rule change between the Commission and any
person other than those that may be withheld from the public in accordance with the
provisions of 5 USC 552 will be available for website viewing and printing in the
Commissionrsquos Public Reference Room 100 F Street NE Washington DC 20549 on
SR-NASDAQ-2015-011 Amendment No 2 Page 64 of 64
official business days between the hours of 1000 am and 300 pm Copies of the filing
also will be available for inspection and copying at the principal office of Nasdaq All
comments received will be posted without change the Commission does not edit
personal identifying information from submissions You should submit only information
that you wish to make available publicly
All submissions should refer to File Number SR-NASDAQ-2015-011 and should
be submitted on or before [insert date 21 days from publication in the Federal Register]
For the Commission by the Division of Trading and Markets pursuant to
delegated authority41
Kevin M OrsquoNeill Deputy Secretary
17 CFR 20030-3(a)(12) 41
SR-NASDAQ-2015-011 Amendment No 2 Page 53 of 64
assets intraday pricing information will be available directly from the applicable listing
exchange
Additional information regarding the Fund and the Shares including investment
strategies risks creation and redemption procedures fees Fund holdings disclosure
policies distributions and taxes will be included in the Registration Statement
Initial and Continued Listing
The Shares will be subject to Rule 5735 which sets forth the initial and continued
listing criteria applicable to Managed Fund Shares The Exchange represents that for
initial andor continued listing the Fund must be in compliance with Rule 10A-338 under
the Act A minimum of 100000 Shares will be outstanding at the commencement of
trading on the Exchange The Exchange will obtain a representation from the issuer of
the Shares that the NAV per Share will be calculated daily and that the NAV and the
Disclosed Portfolio will be made available to all market participants at the same time
Trading Halts
With respect to trading halts the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading in the Shares of the Fund Nasdaq will
halt trading in the Shares under the conditions specified in Nasdaq Rules 4120 and 4121
including the trading pauses under Nasdaq Rules 4120(a)(11) and (12) Trading may be
halted because of market conditions or for reasons that in the view of the Exchange
make trading in the Shares inadvisable These may include (1) the extent to which
trading is not occurring in the securities andor the other assets constituting the Disclosed
Portfolio of the Fund or (2) whether other unusual conditions or circumstances
See 17 CFR 24010A-3 38
SR-NASDAQ-2015-011 Amendment No 2 Page 54 of 64
detrimental to the maintenance of a fair and orderly market are present Trading in the
Shares also will be subject to Rule 5735(d)(2)(D) which sets forth circumstances under
which Shares of the Fund may be halted
Trading Rules
Nasdaq deems the Shares to be equity securities thus rendering trading in the
Shares subject to Nasdaqrsquos existing rules governing the trading of equity securities
Nasdaq will allow trading in the Shares from 400 am until 800 pm Eastern Time
The Exchange has appropriate rules to facilitate transactions in the Shares during all
trading sessions As provided in Nasdaq Rule 5735(b)(3) the minimum price variation
for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $001
Surveillance
The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws39 The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities laws
The surveillances referred to above generally focus on detecting securities trading
outside their normal patterns which could be indicative of manipulative or other violative
activity When such situations are detected surveillance analysis follows and
FINRA surveils trading on the Exchange pursuant to a regulatory services agreement The Exchange is responsible for FINRArsquos performance under this regulatory services agreement
39
SR-NASDAQ-2015-011 Amendment No 2 Page 55 of 64
investigations are opened where appropriate to review the behavior of all relevant
parties for all relevant trading violations
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 56 of 64
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
SR-NASDAQ-2015-011 Amendment No 2 Page 57 of 64
2 Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
SR-NASDAQ-2015-011 Amendment No 2 Page 58 of 64
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
SR-NASDAQ-2015-011 Amendment No 2 Page 59 of 64
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
SR-NASDAQ-2015-011 Amendment No 2 Page 60 of 64
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 61 of 64
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
SR-NASDAQ-2015-011 Amendment No 2 Page 62 of 64
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
B Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
C Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received From Members Participants or Others
Written comments were neither solicited nor received
III Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Within 45 days of the date of publication of this notice in the Federal Register or
within such longer period (i) as the Commission may designate up to 90 days of such date
if it finds such longer period to be appropriate and publishes its reasons for so finding or
(ii) as to which the Exchange consents the Commission shall (a) by order approve or
disapprove such proposed rule change or (b) institute proceedings to determine whether
the proposed rule change should be disapproved
SR-NASDAQ-2015-011 Amendment No 2 Page 63 of 64
IV Solicitation of Comments
Interested persons are invited to submit written data views and arguments
concerning the foregoing including whether the proposed rule change is consistent with
the Act Comments may be submitted by any of the following methods
Electronic comments
bull Use the Commissionrsquos Internet comment form
(httpwwwsecgovrulessroshtml) or
bull Send an e-mail to rule-commentssecgov Please include File Number
SR-NASDAQ-2015-011 on the subject line
Paper comments
bull Send paper comments in triplicate to Brent J Fields Secretary Securities and
Exchange Commission Station Place 100 F Street NE Washington DC
20549-9303
All submissions should refer to File Number SR-NASDAQ-2015-011 This file number
should be included on the subject line if e-mail is used To help the Commission process
and review your comments more efficiently please use only one method The
Commission will post all comments on the Commissionrsquos Internet website
httpwwwsecgovrulessroshtml
Copies of the submission all subsequent amendments all written statements with
respect to the proposed rule change that are filed with the Commission and all written
communications relating to the proposed rule change between the Commission and any
person other than those that may be withheld from the public in accordance with the
provisions of 5 USC 552 will be available for website viewing and printing in the
Commissionrsquos Public Reference Room 100 F Street NE Washington DC 20549 on
SR-NASDAQ-2015-011 Amendment No 2 Page 64 of 64
official business days between the hours of 1000 am and 300 pm Copies of the filing
also will be available for inspection and copying at the principal office of Nasdaq All
comments received will be posted without change the Commission does not edit
personal identifying information from submissions You should submit only information
that you wish to make available publicly
All submissions should refer to File Number SR-NASDAQ-2015-011 and should
be submitted on or before [insert date 21 days from publication in the Federal Register]
For the Commission by the Division of Trading and Markets pursuant to
delegated authority41
Kevin M OrsquoNeill Deputy Secretary
17 CFR 20030-3(a)(12) 41
SR-NASDAQ-2015-011 Amendment No 2 Page 54 of 64
detrimental to the maintenance of a fair and orderly market are present Trading in the
Shares also will be subject to Rule 5735(d)(2)(D) which sets forth circumstances under
which Shares of the Fund may be halted
Trading Rules
Nasdaq deems the Shares to be equity securities thus rendering trading in the
Shares subject to Nasdaqrsquos existing rules governing the trading of equity securities
Nasdaq will allow trading in the Shares from 400 am until 800 pm Eastern Time
The Exchange has appropriate rules to facilitate transactions in the Shares during all
trading sessions As provided in Nasdaq Rule 5735(b)(3) the minimum price variation
for quoting and entry of orders in Managed Fund Shares traded on the Exchange is $001
Surveillance
The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws39 The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities laws
The surveillances referred to above generally focus on detecting securities trading
outside their normal patterns which could be indicative of manipulative or other violative
activity When such situations are detected surveillance analysis follows and
FINRA surveils trading on the Exchange pursuant to a regulatory services agreement The Exchange is responsible for FINRArsquos performance under this regulatory services agreement
39
SR-NASDAQ-2015-011 Amendment No 2 Page 55 of 64
investigations are opened where appropriate to review the behavior of all relevant
parties for all relevant trading violations
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 56 of 64
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
SR-NASDAQ-2015-011 Amendment No 2 Page 57 of 64
2 Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
SR-NASDAQ-2015-011 Amendment No 2 Page 58 of 64
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
SR-NASDAQ-2015-011 Amendment No 2 Page 59 of 64
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
SR-NASDAQ-2015-011 Amendment No 2 Page 60 of 64
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 61 of 64
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
SR-NASDAQ-2015-011 Amendment No 2 Page 62 of 64
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
B Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
C Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received From Members Participants or Others
Written comments were neither solicited nor received
III Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Within 45 days of the date of publication of this notice in the Federal Register or
within such longer period (i) as the Commission may designate up to 90 days of such date
if it finds such longer period to be appropriate and publishes its reasons for so finding or
(ii) as to which the Exchange consents the Commission shall (a) by order approve or
disapprove such proposed rule change or (b) institute proceedings to determine whether
the proposed rule change should be disapproved
SR-NASDAQ-2015-011 Amendment No 2 Page 63 of 64
IV Solicitation of Comments
Interested persons are invited to submit written data views and arguments
concerning the foregoing including whether the proposed rule change is consistent with
the Act Comments may be submitted by any of the following methods
Electronic comments
bull Use the Commissionrsquos Internet comment form
(httpwwwsecgovrulessroshtml) or
bull Send an e-mail to rule-commentssecgov Please include File Number
SR-NASDAQ-2015-011 on the subject line
Paper comments
bull Send paper comments in triplicate to Brent J Fields Secretary Securities and
Exchange Commission Station Place 100 F Street NE Washington DC
20549-9303
All submissions should refer to File Number SR-NASDAQ-2015-011 This file number
should be included on the subject line if e-mail is used To help the Commission process
and review your comments more efficiently please use only one method The
Commission will post all comments on the Commissionrsquos Internet website
httpwwwsecgovrulessroshtml
Copies of the submission all subsequent amendments all written statements with
respect to the proposed rule change that are filed with the Commission and all written
communications relating to the proposed rule change between the Commission and any
person other than those that may be withheld from the public in accordance with the
provisions of 5 USC 552 will be available for website viewing and printing in the
Commissionrsquos Public Reference Room 100 F Street NE Washington DC 20549 on
SR-NASDAQ-2015-011 Amendment No 2 Page 64 of 64
official business days between the hours of 1000 am and 300 pm Copies of the filing
also will be available for inspection and copying at the principal office of Nasdaq All
comments received will be posted without change the Commission does not edit
personal identifying information from submissions You should submit only information
that you wish to make available publicly
All submissions should refer to File Number SR-NASDAQ-2015-011 and should
be submitted on or before [insert date 21 days from publication in the Federal Register]
For the Commission by the Division of Trading and Markets pursuant to
delegated authority41
Kevin M OrsquoNeill Deputy Secretary
17 CFR 20030-3(a)(12) 41
SR-NASDAQ-2015-011 Amendment No 2 Page 55 of 64
investigations are opened where appropriate to review the behavior of all relevant
parties for all relevant trading violations
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG40 and FINRA may obtain
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
For a list of the current members of ISG see wwwisgportalorg The Exchange notes that not all components of the Disclosed Portfolio may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement
40
SR-NASDAQ-2015-011 Amendment No 2 Page 56 of 64
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
SR-NASDAQ-2015-011 Amendment No 2 Page 57 of 64
2 Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
SR-NASDAQ-2015-011 Amendment No 2 Page 58 of 64
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
SR-NASDAQ-2015-011 Amendment No 2 Page 59 of 64
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
SR-NASDAQ-2015-011 Amendment No 2 Page 60 of 64
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 61 of 64
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
SR-NASDAQ-2015-011 Amendment No 2 Page 62 of 64
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
B Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
C Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received From Members Participants or Others
Written comments were neither solicited nor received
III Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Within 45 days of the date of publication of this notice in the Federal Register or
within such longer period (i) as the Commission may designate up to 90 days of such date
if it finds such longer period to be appropriate and publishes its reasons for so finding or
(ii) as to which the Exchange consents the Commission shall (a) by order approve or
disapprove such proposed rule change or (b) institute proceedings to determine whether
the proposed rule change should be disapproved
SR-NASDAQ-2015-011 Amendment No 2 Page 63 of 64
IV Solicitation of Comments
Interested persons are invited to submit written data views and arguments
concerning the foregoing including whether the proposed rule change is consistent with
the Act Comments may be submitted by any of the following methods
Electronic comments
bull Use the Commissionrsquos Internet comment form
(httpwwwsecgovrulessroshtml) or
bull Send an e-mail to rule-commentssecgov Please include File Number
SR-NASDAQ-2015-011 on the subject line
Paper comments
bull Send paper comments in triplicate to Brent J Fields Secretary Securities and
Exchange Commission Station Place 100 F Street NE Washington DC
20549-9303
All submissions should refer to File Number SR-NASDAQ-2015-011 This file number
should be included on the subject line if e-mail is used To help the Commission process
and review your comments more efficiently please use only one method The
Commission will post all comments on the Commissionrsquos Internet website
httpwwwsecgovrulessroshtml
Copies of the submission all subsequent amendments all written statements with
respect to the proposed rule change that are filed with the Commission and all written
communications relating to the proposed rule change between the Commission and any
person other than those that may be withheld from the public in accordance with the
provisions of 5 USC 552 will be available for website viewing and printing in the
Commissionrsquos Public Reference Room 100 F Street NE Washington DC 20549 on
SR-NASDAQ-2015-011 Amendment No 2 Page 64 of 64
official business days between the hours of 1000 am and 300 pm Copies of the filing
also will be available for inspection and copying at the principal office of Nasdaq All
comments received will be posted without change the Commission does not edit
personal identifying information from submissions You should submit only information
that you wish to make available publicly
All submissions should refer to File Number SR-NASDAQ-2015-011 and should
be submitted on or before [insert date 21 days from publication in the Federal Register]
For the Commission by the Division of Trading and Markets pursuant to
delegated authority41
Kevin M OrsquoNeill Deputy Secretary
17 CFR 20030-3(a)(12) 41
SR-NASDAQ-2015-011 Amendment No 2 Page 56 of 64
In addition the Exchange also has a general policy prohibiting the distribution of
material non-public information by its employees
Information Circular
Prior to the commencement of trading the Exchange will inform its members in
an Information Circular of the special characteristics and risks associated with trading the
Shares Specifically the Information Circular will discuss the following (1) the
procedures for purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable) (2) Nasdaq Rule 2111A which imposes suitability
obligations on Nasdaq members with respect to recommending transactions in the Shares
to customers (3) how information regarding the Intraday Indicative Value is
disseminated (4) the risks involved in trading the Shares during the Pre-Market and
Post-Market Sessions when an updated Intraday Indicative Value will not be calculated
or publicly disseminated (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with the confirmation
of a transaction and (6) trading information The Information Circular will also discuss
any exemptive no-action and interpretive relief granted by the Commission from any
rules under the Act
Additionally the Information Circular will reference that the Fund is subject to
various fees and expenses described in the Registration Statement The Information
Circular will also disclose the trading hours of the Shares of the Fund and the applicable
NAV Calculation Time for the Shares The Information Circular will disclose that
information about the Shares of the Fund will be publicly available on the Fundrsquos
website
SR-NASDAQ-2015-011 Amendment No 2 Page 57 of 64
2 Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
SR-NASDAQ-2015-011 Amendment No 2 Page 58 of 64
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
SR-NASDAQ-2015-011 Amendment No 2 Page 59 of 64
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
SR-NASDAQ-2015-011 Amendment No 2 Page 60 of 64
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 61 of 64
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
SR-NASDAQ-2015-011 Amendment No 2 Page 62 of 64
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
B Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
C Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received From Members Participants or Others
Written comments were neither solicited nor received
III Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Within 45 days of the date of publication of this notice in the Federal Register or
within such longer period (i) as the Commission may designate up to 90 days of such date
if it finds such longer period to be appropriate and publishes its reasons for so finding or
(ii) as to which the Exchange consents the Commission shall (a) by order approve or
disapprove such proposed rule change or (b) institute proceedings to determine whether
the proposed rule change should be disapproved
SR-NASDAQ-2015-011 Amendment No 2 Page 63 of 64
IV Solicitation of Comments
Interested persons are invited to submit written data views and arguments
concerning the foregoing including whether the proposed rule change is consistent with
the Act Comments may be submitted by any of the following methods
Electronic comments
bull Use the Commissionrsquos Internet comment form
(httpwwwsecgovrulessroshtml) or
bull Send an e-mail to rule-commentssecgov Please include File Number
SR-NASDAQ-2015-011 on the subject line
Paper comments
bull Send paper comments in triplicate to Brent J Fields Secretary Securities and
Exchange Commission Station Place 100 F Street NE Washington DC
20549-9303
All submissions should refer to File Number SR-NASDAQ-2015-011 This file number
should be included on the subject line if e-mail is used To help the Commission process
and review your comments more efficiently please use only one method The
Commission will post all comments on the Commissionrsquos Internet website
httpwwwsecgovrulessroshtml
Copies of the submission all subsequent amendments all written statements with
respect to the proposed rule change that are filed with the Commission and all written
communications relating to the proposed rule change between the Commission and any
person other than those that may be withheld from the public in accordance with the
provisions of 5 USC 552 will be available for website viewing and printing in the
Commissionrsquos Public Reference Room 100 F Street NE Washington DC 20549 on
SR-NASDAQ-2015-011 Amendment No 2 Page 64 of 64
official business days between the hours of 1000 am and 300 pm Copies of the filing
also will be available for inspection and copying at the principal office of Nasdaq All
comments received will be posted without change the Commission does not edit
personal identifying information from submissions You should submit only information
that you wish to make available publicly
All submissions should refer to File Number SR-NASDAQ-2015-011 and should
be submitted on or before [insert date 21 days from publication in the Federal Register]
For the Commission by the Division of Trading and Markets pursuant to
delegated authority41
Kevin M OrsquoNeill Deputy Secretary
17 CFR 20030-3(a)(12) 41
SR-NASDAQ-2015-011 Amendment No 2 Page 57 of 64
2 Statutory Basis
Nasdaq believes that the proposal is consistent with Section 6(b) of the Act in
general and Section 6(b)(5) of the Act in particular in that it is designed to prevent
fraudulent and manipulative acts and practices to promote just and equitable principles
of trade to foster cooperation and coordination with persons engaged in facilitating
transactions in securities and to remove impediments to and perfect the mechanism of a
free and open market and in general to protect investors and the public interest
The Exchange believes that the proposed rule change is designed to prevent
fraudulent and manipulative acts and practices in that the Shares will be listed and traded
on the Exchange pursuant to the initial and continued listing criteria in Nasdaq Rule
5735 The Exchange represents that trading in the Shares will be subject to the existing
trading surveillances administered by both Nasdaq and also FINRA on behalf of the
Exchange which are designed to detect violations of Exchange rules and applicable
federal securities laws
The Adviser is not a broker-dealer although it is affiliated with the Distributor a
broker-dealer and is required to implement a ldquofire wallrdquo with respect to such broker-
dealer affiliate regarding access to information concerning the composition andor
changes to the Fundrsquos portfolio In addition paragraph (g) of Nasdaq Rule 5735 further
requires that personnel who make decisions on the open-end fundrsquos portfolio composition
must be subject to procedures designed to prevent the use and dissemination of material
non-public information regarding the open-end fundrsquos portfolio
FINRA on behalf of the Exchange will communicate as needed regarding
trading in the Shares and the exchange-traded securities and instruments held by the Fund
with other markets and other entities that are members of ISG and FINRA may obtain
SR-NASDAQ-2015-011 Amendment No 2 Page 58 of 64
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
SR-NASDAQ-2015-011 Amendment No 2 Page 59 of 64
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
SR-NASDAQ-2015-011 Amendment No 2 Page 60 of 64
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 61 of 64
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
SR-NASDAQ-2015-011 Amendment No 2 Page 62 of 64
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
B Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
C Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received From Members Participants or Others
Written comments were neither solicited nor received
III Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Within 45 days of the date of publication of this notice in the Federal Register or
within such longer period (i) as the Commission may designate up to 90 days of such date
if it finds such longer period to be appropriate and publishes its reasons for so finding or
(ii) as to which the Exchange consents the Commission shall (a) by order approve or
disapprove such proposed rule change or (b) institute proceedings to determine whether
the proposed rule change should be disapproved
SR-NASDAQ-2015-011 Amendment No 2 Page 63 of 64
IV Solicitation of Comments
Interested persons are invited to submit written data views and arguments
concerning the foregoing including whether the proposed rule change is consistent with
the Act Comments may be submitted by any of the following methods
Electronic comments
bull Use the Commissionrsquos Internet comment form
(httpwwwsecgovrulessroshtml) or
bull Send an e-mail to rule-commentssecgov Please include File Number
SR-NASDAQ-2015-011 on the subject line
Paper comments
bull Send paper comments in triplicate to Brent J Fields Secretary Securities and
Exchange Commission Station Place 100 F Street NE Washington DC
20549-9303
All submissions should refer to File Number SR-NASDAQ-2015-011 This file number
should be included on the subject line if e-mail is used To help the Commission process
and review your comments more efficiently please use only one method The
Commission will post all comments on the Commissionrsquos Internet website
httpwwwsecgovrulessroshtml
Copies of the submission all subsequent amendments all written statements with
respect to the proposed rule change that are filed with the Commission and all written
communications relating to the proposed rule change between the Commission and any
person other than those that may be withheld from the public in accordance with the
provisions of 5 USC 552 will be available for website viewing and printing in the
Commissionrsquos Public Reference Room 100 F Street NE Washington DC 20549 on
SR-NASDAQ-2015-011 Amendment No 2 Page 64 of 64
official business days between the hours of 1000 am and 300 pm Copies of the filing
also will be available for inspection and copying at the principal office of Nasdaq All
comments received will be posted without change the Commission does not edit
personal identifying information from submissions You should submit only information
that you wish to make available publicly
All submissions should refer to File Number SR-NASDAQ-2015-011 and should
be submitted on or before [insert date 21 days from publication in the Federal Register]
For the Commission by the Division of Trading and Markets pursuant to
delegated authority41
Kevin M OrsquoNeill Deputy Secretary
17 CFR 20030-3(a)(12) 41
SR-NASDAQ-2015-011 Amendment No 2 Page 58 of 64
trading information regarding trading in the Shares and the exchange-traded securities
and instruments held by the Fund from such markets and other entities In addition the
Exchange may obtain information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from markets and other
entities that are members of ISG which includes securities and futures exchanges or
with which the Exchange has in place a comprehensive surveillance sharing agreement
Moreover FINRA on behalf of the Exchange will be able to access as needed trade
information for certain Floating Rate Debt Instruments and other debt securities held by
the Fund reported to FINRArsquos TRACE
All of the Fundrsquos net assets that are invested in exchange-traded equity securities
will be invested in securities that trade in markets that are members of ISG or are parties
to a comprehensive surveillance sharing agreement with the Exchange At least 90 of
the Fundrsquos net assets that are invested in exchange-traded derivative instruments will be
invested in instruments that trade in markets that are members of ISG or are parties to a
comprehensive surveillance sharing agreement with the Exchange
The investment objective of the Fund will be to seek current income To achieve
its objective the Fund will invest under normal market conditions at least 80 of its net
assets in a portfolio of Floating Rate Debt Instruments In addition the Fund may invest
up to 20 of its net assets in certain fixed-rate debt securities The Fund may invest up
to 20 of the value of its net assets in exchange-listed options on US Treasury futures
contracts and exchange-listed US Treasury futures contracts The Fundrsquos investments in
derivative instruments will be consistent with the Fundrsquos investment objective and the
1940 Act and will not be used to seek to achieve a multiple or inverse multiple of an
SR-NASDAQ-2015-011 Amendment No 2 Page 59 of 64
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
SR-NASDAQ-2015-011 Amendment No 2 Page 60 of 64
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 61 of 64
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
SR-NASDAQ-2015-011 Amendment No 2 Page 62 of 64
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
B Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
C Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received From Members Participants or Others
Written comments were neither solicited nor received
III Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Within 45 days of the date of publication of this notice in the Federal Register or
within such longer period (i) as the Commission may designate up to 90 days of such date
if it finds such longer period to be appropriate and publishes its reasons for so finding or
(ii) as to which the Exchange consents the Commission shall (a) by order approve or
disapprove such proposed rule change or (b) institute proceedings to determine whether
the proposed rule change should be disapproved
SR-NASDAQ-2015-011 Amendment No 2 Page 63 of 64
IV Solicitation of Comments
Interested persons are invited to submit written data views and arguments
concerning the foregoing including whether the proposed rule change is consistent with
the Act Comments may be submitted by any of the following methods
Electronic comments
bull Use the Commissionrsquos Internet comment form
(httpwwwsecgovrulessroshtml) or
bull Send an e-mail to rule-commentssecgov Please include File Number
SR-NASDAQ-2015-011 on the subject line
Paper comments
bull Send paper comments in triplicate to Brent J Fields Secretary Securities and
Exchange Commission Station Place 100 F Street NE Washington DC
20549-9303
All submissions should refer to File Number SR-NASDAQ-2015-011 This file number
should be included on the subject line if e-mail is used To help the Commission process
and review your comments more efficiently please use only one method The
Commission will post all comments on the Commissionrsquos Internet website
httpwwwsecgovrulessroshtml
Copies of the submission all subsequent amendments all written statements with
respect to the proposed rule change that are filed with the Commission and all written
communications relating to the proposed rule change between the Commission and any
person other than those that may be withheld from the public in accordance with the
provisions of 5 USC 552 will be available for website viewing and printing in the
Commissionrsquos Public Reference Room 100 F Street NE Washington DC 20549 on
SR-NASDAQ-2015-011 Amendment No 2 Page 64 of 64
official business days between the hours of 1000 am and 300 pm Copies of the filing
also will be available for inspection and copying at the principal office of Nasdaq All
comments received will be posted without change the Commission does not edit
personal identifying information from submissions You should submit only information
that you wish to make available publicly
All submissions should refer to File Number SR-NASDAQ-2015-011 and should
be submitted on or before [insert date 21 days from publication in the Federal Register]
For the Commission by the Division of Trading and Markets pursuant to
delegated authority41
Kevin M OrsquoNeill Deputy Secretary
17 CFR 20030-3(a)(12) 41
SR-NASDAQ-2015-011 Amendment No 2 Page 59 of 64
index At least 65 of the Fundrsquos net assets will be invested in Floating Rate Debt
Instruments that are at the time of purchase investment grade The Fund will limit its
investments in asset-backed securities (excluding agency mortgage-backed securities)
and non-agency mortgage-backed securities (in the aggregate) to 20 of its net assets In
addition the Fund will limit its investments in junior loans to 20 of its net assets The
Fund may hold up to an aggregate amount of 15 of its net assets in illiquid assets
(calculated at the time of investment) including Rule 144A securities deemed illiquid by
the Adviser The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether in light of current circumstances an adequate level of liquidity is
being maintained and will consider taking appropriate steps in order to maintain
adequate liquidity if through a change in values net assets or other circumstances more
than 15 of the Fundrsquos net assets are held in illiquid assets Illiquid assets include
securities subject to contractual or other restrictions on resale and other instruments that
lack readily available markets as determined in accordance with Commission staff
guidance
The proposed rule change is designed to promote just and equitable principles of
trade and to protect investors and the public interest in that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made available to all market
participants at the same time In addition a large amount of information will be publicly
available regarding the Fund and the Shares thereby promoting market transparency
Moreover the Intraday Indicative Value available on the NASDAQ OMX Information
LLC proprietary index data service will be widely disseminated by one or more major
SR-NASDAQ-2015-011 Amendment No 2 Page 60 of 64
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 61 of 64
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
SR-NASDAQ-2015-011 Amendment No 2 Page 62 of 64
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
B Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
C Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received From Members Participants or Others
Written comments were neither solicited nor received
III Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Within 45 days of the date of publication of this notice in the Federal Register or
within such longer period (i) as the Commission may designate up to 90 days of such date
if it finds such longer period to be appropriate and publishes its reasons for so finding or
(ii) as to which the Exchange consents the Commission shall (a) by order approve or
disapprove such proposed rule change or (b) institute proceedings to determine whether
the proposed rule change should be disapproved
SR-NASDAQ-2015-011 Amendment No 2 Page 63 of 64
IV Solicitation of Comments
Interested persons are invited to submit written data views and arguments
concerning the foregoing including whether the proposed rule change is consistent with
the Act Comments may be submitted by any of the following methods
Electronic comments
bull Use the Commissionrsquos Internet comment form
(httpwwwsecgovrulessroshtml) or
bull Send an e-mail to rule-commentssecgov Please include File Number
SR-NASDAQ-2015-011 on the subject line
Paper comments
bull Send paper comments in triplicate to Brent J Fields Secretary Securities and
Exchange Commission Station Place 100 F Street NE Washington DC
20549-9303
All submissions should refer to File Number SR-NASDAQ-2015-011 This file number
should be included on the subject line if e-mail is used To help the Commission process
and review your comments more efficiently please use only one method The
Commission will post all comments on the Commissionrsquos Internet website
httpwwwsecgovrulessroshtml
Copies of the submission all subsequent amendments all written statements with
respect to the proposed rule change that are filed with the Commission and all written
communications relating to the proposed rule change between the Commission and any
person other than those that may be withheld from the public in accordance with the
provisions of 5 USC 552 will be available for website viewing and printing in the
Commissionrsquos Public Reference Room 100 F Street NE Washington DC 20549 on
SR-NASDAQ-2015-011 Amendment No 2 Page 64 of 64
official business days between the hours of 1000 am and 300 pm Copies of the filing
also will be available for inspection and copying at the principal office of Nasdaq All
comments received will be posted without change the Commission does not edit
personal identifying information from submissions You should submit only information
that you wish to make available publicly
All submissions should refer to File Number SR-NASDAQ-2015-011 and should
be submitted on or before [insert date 21 days from publication in the Federal Register]
For the Commission by the Division of Trading and Markets pursuant to
delegated authority41
Kevin M OrsquoNeill Deputy Secretary
17 CFR 20030-3(a)(12) 41
SR-NASDAQ-2015-011 Amendment No 2 Page 60 of 64
market data vendors and broadly displayed at least every 15 seconds during the Regular
Market Session On each business day before commencement of trading in Shares in the
Regular Market Session on the Exchange the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fundrsquos calculation of NAV at the end
of the business day Information regarding market price and trading volume of the
Shares will be continually available on a real-time basis throughout the day on brokersrsquo
computer screens and other electronic services and quotation and last sale information
for the Shares will be available via Nasdaq proprietary quote and trade services as well
as in accordance with the Unlisted Trading Privileges and the CTA plans for the Shares
Quotation and last sale information for the other ETFs in which the Fund will invest will
be available via the quote and trade services of their respective primary exchanges as
well as in accordance with the Unlisted Trading Privileges and the CTA plans as
applicable Quotation and last sale information for US exchange-traded options will be
available via the Options Price Reporting Authority Intraday executable price quotations
on Floating Rate Debt Instruments and other assets not traded on an exchange will be
available from major broker-dealer firms or market data vendors as well as from
automated quotation systems published or other public sources or online information
services Additionally FINRArsquos TRACE will be a source of price information for
corporate bonds privately-issued securities mortgage-backed securities and asset-backed
securities to the extent transactions in such securities are reported to TRACE For
exchange-traded assets intraday pricing information will be available directly from the
applicable listing exchange
SR-NASDAQ-2015-011 Amendment No 2 Page 61 of 64
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
SR-NASDAQ-2015-011 Amendment No 2 Page 62 of 64
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
B Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
C Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received From Members Participants or Others
Written comments were neither solicited nor received
III Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Within 45 days of the date of publication of this notice in the Federal Register or
within such longer period (i) as the Commission may designate up to 90 days of such date
if it finds such longer period to be appropriate and publishes its reasons for so finding or
(ii) as to which the Exchange consents the Commission shall (a) by order approve or
disapprove such proposed rule change or (b) institute proceedings to determine whether
the proposed rule change should be disapproved
SR-NASDAQ-2015-011 Amendment No 2 Page 63 of 64
IV Solicitation of Comments
Interested persons are invited to submit written data views and arguments
concerning the foregoing including whether the proposed rule change is consistent with
the Act Comments may be submitted by any of the following methods
Electronic comments
bull Use the Commissionrsquos Internet comment form
(httpwwwsecgovrulessroshtml) or
bull Send an e-mail to rule-commentssecgov Please include File Number
SR-NASDAQ-2015-011 on the subject line
Paper comments
bull Send paper comments in triplicate to Brent J Fields Secretary Securities and
Exchange Commission Station Place 100 F Street NE Washington DC
20549-9303
All submissions should refer to File Number SR-NASDAQ-2015-011 This file number
should be included on the subject line if e-mail is used To help the Commission process
and review your comments more efficiently please use only one method The
Commission will post all comments on the Commissionrsquos Internet website
httpwwwsecgovrulessroshtml
Copies of the submission all subsequent amendments all written statements with
respect to the proposed rule change that are filed with the Commission and all written
communications relating to the proposed rule change between the Commission and any
person other than those that may be withheld from the public in accordance with the
provisions of 5 USC 552 will be available for website viewing and printing in the
Commissionrsquos Public Reference Room 100 F Street NE Washington DC 20549 on
SR-NASDAQ-2015-011 Amendment No 2 Page 64 of 64
official business days between the hours of 1000 am and 300 pm Copies of the filing
also will be available for inspection and copying at the principal office of Nasdaq All
comments received will be posted without change the Commission does not edit
personal identifying information from submissions You should submit only information
that you wish to make available publicly
All submissions should refer to File Number SR-NASDAQ-2015-011 and should
be submitted on or before [insert date 21 days from publication in the Federal Register]
For the Commission by the Division of Trading and Markets pursuant to
delegated authority41
Kevin M OrsquoNeill Deputy Secretary
17 CFR 20030-3(a)(12) 41
SR-NASDAQ-2015-011 Amendment No 2 Page 61 of 64
The Fundrsquos website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative information Trading in
Shares of the Fund will be halted under the conditions specified in Nasdaq Rules 4120
and 4121 or because of market conditions or for reasons that in the view of the
Exchange make trading in the Shares inadvisable and trading in the Shares will be
subject to Nasdaq Rule 5735(d)(2)(D) which sets forth circumstances under which
Shares of the Fund may be halted In addition as noted above investors will have ready
access to information regarding the Fundrsquos holdings the Intraday Indicative Value the
Disclosed Portfolio and quotation and last sale information for the Shares
The Fundrsquos investments will be valued daily at market value or in the absence of
market value with respect to any investment at fair value in each case in accordance
with the Valuation Procedures and the 1940 Act
The proposed rule change is designed to perfect the mechanism of a free and open
market and in general to protect investors and the public interest in that it will facilitate
the listing and trading of an additional type of actively-managed exchange-traded product
that will enhance competition among market participants to the benefit of investors and
the marketplace As noted above FINRA on behalf of the Exchange will communicate
as needed regarding trading in the Shares and the exchange-traded securities and
instruments held by the Fund with other markets and other entities that are members of
ISG and FINRA may obtain trading information regarding trading in the Shares and the
exchange-traded securities and instruments held by the Fund from such markets and other
entities In addition the Exchange may obtain information regarding trading in the
Shares and in the exchange-traded securities and instruments held by the Fund from
SR-NASDAQ-2015-011 Amendment No 2 Page 62 of 64
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
B Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
C Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received From Members Participants or Others
Written comments were neither solicited nor received
III Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Within 45 days of the date of publication of this notice in the Federal Register or
within such longer period (i) as the Commission may designate up to 90 days of such date
if it finds such longer period to be appropriate and publishes its reasons for so finding or
(ii) as to which the Exchange consents the Commission shall (a) by order approve or
disapprove such proposed rule change or (b) institute proceedings to determine whether
the proposed rule change should be disapproved
SR-NASDAQ-2015-011 Amendment No 2 Page 63 of 64
IV Solicitation of Comments
Interested persons are invited to submit written data views and arguments
concerning the foregoing including whether the proposed rule change is consistent with
the Act Comments may be submitted by any of the following methods
Electronic comments
bull Use the Commissionrsquos Internet comment form
(httpwwwsecgovrulessroshtml) or
bull Send an e-mail to rule-commentssecgov Please include File Number
SR-NASDAQ-2015-011 on the subject line
Paper comments
bull Send paper comments in triplicate to Brent J Fields Secretary Securities and
Exchange Commission Station Place 100 F Street NE Washington DC
20549-9303
All submissions should refer to File Number SR-NASDAQ-2015-011 This file number
should be included on the subject line if e-mail is used To help the Commission process
and review your comments more efficiently please use only one method The
Commission will post all comments on the Commissionrsquos Internet website
httpwwwsecgovrulessroshtml
Copies of the submission all subsequent amendments all written statements with
respect to the proposed rule change that are filed with the Commission and all written
communications relating to the proposed rule change between the Commission and any
person other than those that may be withheld from the public in accordance with the
provisions of 5 USC 552 will be available for website viewing and printing in the
Commissionrsquos Public Reference Room 100 F Street NE Washington DC 20549 on
SR-NASDAQ-2015-011 Amendment No 2 Page 64 of 64
official business days between the hours of 1000 am and 300 pm Copies of the filing
also will be available for inspection and copying at the principal office of Nasdaq All
comments received will be posted without change the Commission does not edit
personal identifying information from submissions You should submit only information
that you wish to make available publicly
All submissions should refer to File Number SR-NASDAQ-2015-011 and should
be submitted on or before [insert date 21 days from publication in the Federal Register]
For the Commission by the Division of Trading and Markets pursuant to
delegated authority41
Kevin M OrsquoNeill Deputy Secretary
17 CFR 20030-3(a)(12) 41
SR-NASDAQ-2015-011 Amendment No 2 Page 62 of 64
markets and other entities that are members of ISG which includes securities and futures
exchanges or with which the Exchange has in place a comprehensive surveillance
sharing agreement Furthermore as noted above investors will have ready access to
information regarding the Fundrsquos holdings the Intraday Indicative Value the Disclosed
Portfolio and quotation and last sale information for the Shares
For the above reasons Nasdaq believes the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act
B Self-Regulatory Organizationrsquos Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in furtherance of the purposes
of the Act The Exchange believes that the proposed rule change will facilitate the listing
and trading of an additional type of actively-managed exchange-traded fund that will
enhance competition among market participants to the benefit of investors and the
marketplace
C Self-Regulatory Organizationrsquos Statement on Comments on the Proposed Rule Change Received From Members Participants or Others
Written comments were neither solicited nor received
III Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Within 45 days of the date of publication of this notice in the Federal Register or
within such longer period (i) as the Commission may designate up to 90 days of such date
if it finds such longer period to be appropriate and publishes its reasons for so finding or
(ii) as to which the Exchange consents the Commission shall (a) by order approve or
disapprove such proposed rule change or (b) institute proceedings to determine whether
the proposed rule change should be disapproved
SR-NASDAQ-2015-011 Amendment No 2 Page 63 of 64
IV Solicitation of Comments
Interested persons are invited to submit written data views and arguments
concerning the foregoing including whether the proposed rule change is consistent with
the Act Comments may be submitted by any of the following methods
Electronic comments
bull Use the Commissionrsquos Internet comment form
(httpwwwsecgovrulessroshtml) or
bull Send an e-mail to rule-commentssecgov Please include File Number
SR-NASDAQ-2015-011 on the subject line
Paper comments
bull Send paper comments in triplicate to Brent J Fields Secretary Securities and
Exchange Commission Station Place 100 F Street NE Washington DC
20549-9303
All submissions should refer to File Number SR-NASDAQ-2015-011 This file number
should be included on the subject line if e-mail is used To help the Commission process
and review your comments more efficiently please use only one method The
Commission will post all comments on the Commissionrsquos Internet website
httpwwwsecgovrulessroshtml
Copies of the submission all subsequent amendments all written statements with
respect to the proposed rule change that are filed with the Commission and all written
communications relating to the proposed rule change between the Commission and any
person other than those that may be withheld from the public in accordance with the
provisions of 5 USC 552 will be available for website viewing and printing in the
Commissionrsquos Public Reference Room 100 F Street NE Washington DC 20549 on
SR-NASDAQ-2015-011 Amendment No 2 Page 64 of 64
official business days between the hours of 1000 am and 300 pm Copies of the filing
also will be available for inspection and copying at the principal office of Nasdaq All
comments received will be posted without change the Commission does not edit
personal identifying information from submissions You should submit only information
that you wish to make available publicly
All submissions should refer to File Number SR-NASDAQ-2015-011 and should
be submitted on or before [insert date 21 days from publication in the Federal Register]
For the Commission by the Division of Trading and Markets pursuant to
delegated authority41
Kevin M OrsquoNeill Deputy Secretary
17 CFR 20030-3(a)(12) 41
SR-NASDAQ-2015-011 Amendment No 2 Page 63 of 64
IV Solicitation of Comments
Interested persons are invited to submit written data views and arguments
concerning the foregoing including whether the proposed rule change is consistent with
the Act Comments may be submitted by any of the following methods
Electronic comments
bull Use the Commissionrsquos Internet comment form
(httpwwwsecgovrulessroshtml) or
bull Send an e-mail to rule-commentssecgov Please include File Number
SR-NASDAQ-2015-011 on the subject line
Paper comments
bull Send paper comments in triplicate to Brent J Fields Secretary Securities and
Exchange Commission Station Place 100 F Street NE Washington DC
20549-9303
All submissions should refer to File Number SR-NASDAQ-2015-011 This file number
should be included on the subject line if e-mail is used To help the Commission process
and review your comments more efficiently please use only one method The
Commission will post all comments on the Commissionrsquos Internet website
httpwwwsecgovrulessroshtml
Copies of the submission all subsequent amendments all written statements with
respect to the proposed rule change that are filed with the Commission and all written
communications relating to the proposed rule change between the Commission and any
person other than those that may be withheld from the public in accordance with the
provisions of 5 USC 552 will be available for website viewing and printing in the
Commissionrsquos Public Reference Room 100 F Street NE Washington DC 20549 on
SR-NASDAQ-2015-011 Amendment No 2 Page 64 of 64
official business days between the hours of 1000 am and 300 pm Copies of the filing
also will be available for inspection and copying at the principal office of Nasdaq All
comments received will be posted without change the Commission does not edit
personal identifying information from submissions You should submit only information
that you wish to make available publicly
All submissions should refer to File Number SR-NASDAQ-2015-011 and should
be submitted on or before [insert date 21 days from publication in the Federal Register]
For the Commission by the Division of Trading and Markets pursuant to
delegated authority41
Kevin M OrsquoNeill Deputy Secretary
17 CFR 20030-3(a)(12) 41
SR-NASDAQ-2015-011 Amendment No 2 Page 64 of 64
official business days between the hours of 1000 am and 300 pm Copies of the filing
also will be available for inspection and copying at the principal office of Nasdaq All
comments received will be posted without change the Commission does not edit
personal identifying information from submissions You should submit only information
that you wish to make available publicly
All submissions should refer to File Number SR-NASDAQ-2015-011 and should
be submitted on or before [insert date 21 days from publication in the Federal Register]
For the Commission by the Division of Trading and Markets pursuant to
delegated authority41
Kevin M OrsquoNeill Deputy Secretary
17 CFR 20030-3(a)(12) 41